Skip to main content

Full text of "Models for Medicare payment system reform based on group-specific volume performance standards (GVPS)"

See other formats


Models  for  Medicare  Payment  System  Reform  Based  on 
Group-Specific  Volume  Performance  Standards  (GVPS) 


Christopher  P.  Tompkins,  Ph.D. 
Stanley  S.  Wallack,  Ph.D. 
Jon  A.  ChiUngerian,  Ph.D. 
Sarita  Bhalotra,  M.B.,  B.S. 
Mitchell  P.V.  Glavin,  M.Sc,  M.A. 
Grant  A.  Ritter,  Ph.D. 
Dominic  Hodgkin,  Ph.D. 

^^^^^^  for 

Heller  Graduate  School 
Brandeis  University 


Final  Report 

Submitted  to  Teresa  DeCaro,  Project  Officer 
Health  Care  Financing  Administration 


June  9,  .^95 


This  final  report  was  submitted  to  HCFA  under  Cooperative  Agreement  #1 7-C-90129/1-01 .  The 
views  and  opinions  expressed  in  this  report  are  the  authors;  and  no  endorsement  by  HCFA  or 
DHHS  is  intended  or  should  be  inferred. 


Table  of  Contents 

L       Purpose  1 

n.       Overview  of  the  Project  and  Report  2 

A.  The  Project  2 

B.  The  Report  3 

III.  Policy  Context  and  Alternatives  4 

A.  State  Level  MVPS  •  5 

B.  HMO  Risk  Contracting   •  •  •  6 

C.  Penalize  High  Cost  Hospital  Medical  Staffs  o 

IV.  Rationale  and  Goals  for  GVPS  7 

A.  Rationale   7 

B.  Goals  for  HCFA  and  Providers   8 

V.  Summary  of  Basic  GVPS  Models   9 

A.  The  Policy  Context:  MVPS   9 

B.  Methods  to  Monitor  Volume  Performance   10 

C.  Rewards  and  Penalties  12 

VI.  Utilization  Measures   1^ 

A.  The  Basic  Measure:  RPUPS  15 

B.  Scope  of  Service   15 

C.  Illustrative  Findings  16 

VII.  Setting  Performance  Standards  or  Targets  19 

A.  Scope  of  Services  19 

B.  Differential  Growth  Rates  Based  on  Location  22 

C.  Provider  Level  Versus  Market  Level  Changes   ^  25 

D.  Cumulative  Versus  Year-to-Year  Targets  29 

VIII.  Rewards  and  Penalties   35 

A.  Policy  Questions  and  Objectives  35 

B.  Options  for  Rewards  and  Penalties   35 

C.  Reward  and  Penalty  Formulas  38 

D.  Transaction  Mechanisms  42 

E.  Possible  Implications   44 

IX.  Eligibility  Criteria  for  GVPS   45 

A.  Linking  to  Purposes  -  45 

B.  Basic  Eligibility  Criteria    46 

C.  Criteria  for  Managed  Care  and  Preferred  Provider  Initiatives  48 


X.  Provider  Responses  to  GVPS   51 

A.  Deciding  Whether  to  Elect  GVPS  52 

1 .  Meeting  EligibiHty  Criteria  52 

2.  Service  Categories  for  RPUPS  53 

3.  Reward  and  Penalty  S'   .e  53 

B.  Action  Plan   53 

1 .  Increasing  Market  Share   59 

2.  Managing  Cost  and  Utilization   60 

a.  Within  the  Organization  60 

b.  Outside  the  Organization  61 

3.  Care  Management  Strategies  62 

C.  Managing  Performance  63 

1 .  Management  Control  63 

a.  Practice  Guidelines   63 

b.  Feedback  Mechanisms  63 

c.  Compensation  Systems   64 

2.  Evaluating  Performance  64 

a.  RPUPS  64 

b.  Patient  Capture  Ratio  64 

c.  Services  Provided  65 

XI.  Simulations  of  Medicare  Expenditures  and  Rewards  to  Groups  Under  GVPS  ...  65 

A.  Analytic  Framework  65 

1 .  Defining  Financial  Impact  65 

2.  Time  Horizon  66 

3.  Relevant  Services  66 

4.  Defining  a  Base  Case  66 

B.  Assumptions  66 

1 .  Assumptions  About  the  Medicare  Environment  66 

2.  Assumptions  about  the  GVPS  Policy  Design   <  68 

3.  Assumptions  About  Providers  Under  a  GVPS  Program  69 

4.  Summary:  The  Base  Case  Scenario  71 

C.  Findings  72 

1.  Results  72 

2.  Sensitivity  to  Policy  Parameters   75 

3.  Sensitivity  to  Other  Assumptions   75 

D.  Discussion  of  Simulation  Results   78 

XII.  Conclusions  and  Recommendations  79 

82 

References  

Appendix  A:  Consultations  with  Multispecialty  Groups   A-1 

Appendix  B:  Data  ^"^ 

Appendix  C:  Alternative  Model  Specifications   C:-l 


i 


Executive  Summary 

1.  Purpose 

This  report  discusses  potential  policy  options  for  Medicare  based  on  Group-Specific 
Volume  Performance  Standards  (GVPS).  We  developed  a  basic  model  and  analyzed  several 
variations  with  the  following  fundamental  objectives: 

►  To  study  alternatives  to  the  current  system  of  Medicare  Volume  Performance  Standards 
(MVPS)  that  would  allow  qualified  physician  groups  to  elect  separate  performance 
standards;  and  more  generally, 

►  To  explore  ways  for  HCFA  to  control  the  rate  of  increase  in  the  volume  and  intensity  of 
services  delivered  to  Medicare  beneficiaries. 

The  proposed  models  could  give  providers  financial  incentives  to  manage  the  services  delivered 
to  their  Medicare  patients,  and  reduce  Medicare  spending  for  all  covered  services,  not  just 
physician  and  supplier  services. 

Under  MVPS,  fee  updates  for  all  physicians  can  be  reduced  if  annual  volume 
performance  standards  (national  expenditure  targets  for  physician  and  supplier  services)  are  not 
met.  There  are  at  least  three  problems  with  the  mandatory  national  groupings: 

►  Physicians  have  weak  economic  incentives  to  be  efficient  because  individual  performance 
is  aggregated  with  the  rest  of  the  nation. 

►  If  national  standards  are  exceeded,  physicians  who  are  relatively  efficient  get  penalized 
as  //their  own  performance  were  average. 

►  Over  many  years,  shrinking  Medicare  payment  levels  relative  to  other  payers  may 
threaten  beneficiaries'  access  to  physician  services. 

When  MVPS  was  enacted.  Congress  acknowledged  that  refinements  to  the  basic 
approach  could  be  warranted,  and  specifically  called  for  development  of  group-specific 
performance  standards.  This  report  discusses  models  that  would  allow  HCFA  to  monitor  and 
reward  physician  organizations  separately  from  the  national  experience.  Furthermore,  incentives 
can  be  expanded  to  include  efficient  management  of  all  Medicare-covered  services.  Given  its 
general  applicability,  this  approach  may  have  advantages  over  other  policies  such  as  capitation. 
Whereas  Medicare  has  not  achieved  savings  from  HMO  enrollment  because  of  favorable 
selection.  Medicare  cannot  lose  money  on  GVPS  but  would  share  savings  generated  by  efficient 
providers.  In  addition,  GVPS  would  encourage  the  most  efficient  physician  groups  to  serve  the 
most  expensive  Medicare  beneficiaries. 


ii 


2.        Goals  for  GVPS 

An  option  for  a  group  to  elect  separate  performance  standards  presumably  would  require 
a  sufficient  overlap  between  the  interests  and  goals  of  Medicare  and  "qualified"  physician 
groups.  This  overlap  is  likely  to  be  greatest  with  physician  organizations  that  can  be  relatively 
efficient  and  that  provide  high  quality  care. 

Specifically,  we  see  the  following  goals  for  Medicare  and  GVPS: 

*■        Achieve  and  maintain  high  quality  health  care.  Attempts  to  cut  costs  can  run  a  --^k  of 
compromising  quality  and  access.  Medicare  beneficiaries  should  receive  services  that 
equal  or  exceed  prevailing  quality  standards  in  the  local  community. 

►  Improve  clinical  efficiency.  For  each  beneficiary,  the  combination  of  services  results  in 
the  lowest  cost  necessary  to  meet  the  quality  standards.  This  means  avoidance  of 
unnecessary  referrals,  tests,  and  services. 

►  Improve  market  efficiency.  This  is  multifaceted: 

•  Relatively  efficient  providers  are  rewarded  and  increase  their  market  share; 

•  Inefficient  providers  bear  the  brunt  of  fee  reductions  or  other  penalties; 

•  Providers  generally  become  more  efficient  in  response  to  the  market  dynamics,  or 
lose  market  share. 

►  Achieve  budget  neutrality.  Implementation  of  GVPS  does  not  lead  to  higher  aggregate 
Medicare  expenditure  levels. 

Providers  electing  to  participate  under  GVPS  may  not  all  have  the  same  objectives  or 
priorities.  However,  participation  might  help  them  achieve  particular  goals: 

►  Compensation  for  clinical  efficiency.  Savings  attributable  to  clinical  efficiency  could 
be  shared  with  participating  providers. 

►  Greater  market  share.  This  may  be  achieved  by  increasing  the  number  of  patients 
served  and/or  the  scope  of  services  provided. 

►  Support  for  new  strategic  orientations.  Market  pressures  for  efficiency  create  new 
challenges  and  new  opportunities  for  providers.  GVPS  could  promote  strategic 
orientations  that  include,  but  go  beyond  Medicare. 


iii 


In  summary,  GVPS  could  enhance  equity  in  payment  and  create  incentives  for  groups  to 
manage  the  care  of  their  patients.  Many  providers  are  seeking  ways  to  defend  or  increase  their 
market  share  by  efficiently  managing  the  volume  and  intensity  of  services.  GVPS  could 
reinforce  these  initiatives  and  encourage  similar  efficiencies  for  Medicare  patients.  Efficient 
providers  that  meet  target  growth  rates  would  be  rewarded.  Meanwhile,  the  burden  of  financial 
penalties  would  be  more  concentrated  on  physicians  who  have  not  demonstrated  acceptable  rates 
of  increase. 

3.  Basic  Methodological  Approach  / 

The  empirical  work  in  this  study  is  based  on  two  sets  of  providers.  First,  we  worked  with 
a  dozen  physician  groups  located  in  different  parts  of  the  country.  Physicians  and  other 
managers  at  the  groups  have  contributed  to  the  development  of  workable  models  for  GVPS.  In 
addition,  we  gathered  Medicare  claims  data  for  patients  seen  by  these  groups  in  order  to  analyze 
resource  consumption  at  the  provider  level.  Groups  were  defined  at  the  corporate  level  using  the 
Provider  Tax  Number,  which  encompasses  all  relevant  physicians  and  their  billing  numbers. 

A  second  set  of  66  providers  was  selected  from  the  three-digit  ZIP  Code  areas  that 
account  for  at  least  5  percent  of  Medicare  patients  seen  by  each  of  the  original  groups.  In  all,  78 
providers  were  included  in  the  analyses.  For  each  provider,  we  obtained  all  National  Claims 
History  file  records  for  1991,  1992  and  1993  for  all  beneficiaries  seen  during  that  period.  The 
average  number  of  beneficiaries  seen  in  1992  by  the  78  providers  was  about  15,000.  In  addition, 
we  obtained  similar  data  for  random  beneficiary  samples  drawn  from  the  same  market  areas,  in 
order  to  determine  market  level  reimbursement  rates  and  trends  over  time.  Each  provider 
typically  saw  only  a  small  fraction  of  all  users  in  the  entire  market  area  (i.e.,  less  than  10 
percent). 

From  these  data,  we  were  able  to  measure  average  utilization  for  all  Medicare  patients 
seen  by  a  provider  during  each  of  the  observation  years.  Utilization  was  measured  as 
reimbursements  per  patient.  Changes  in  this  measure  at  the  provider  level  were  compared  to 
changes  at  the  market  level.  Comparisons  were  made  with  and  without  adjustments  for  changes 
in  health  status. 

4.  GVPS  Models 

GVPS  models  would  supplement  and  refine  the  national  MVPS,  which  focuses  on  rates 
of  increase  rather  than  absolute  expenditure  levels.  This  is  consistent  with  the  policy  goal  of 
achieving  sustainable  growth  rates  in  Medicare  spending.  Proposed  GVPS  models  emulate  the 
focus  on  growth  rates,  which  could  encourage  participation  by  providers  with  relatively  sick 
patients  and/or  elaborate  practice  styles. 

GVPS  models  must  depart  from  some  aspects  of  the  current  MVPS  approach.  First, 
national  expenditures  are  measured  in  total,  with  adjustments  for  changes  in  the  Medicare 


iv 


population  size.  At  the  provider  level,  it  is  more  valid  and  convenient  to  measure  performance 
on  average  for  patients  seen.  Second,  current  performance  standards  are  set  nationally  and 
reflect  average  performance  not  only  across  providers  but  also  across  market  areas.  Valid 
performance  standards  for  providers  need  to  reflect  local  market  conditions,  not  expectations 
averaged  across  all  market  areas  in  the  country.  Thirc, ....  case  mix  of  patients  seen  by  a 
provider  can  change  over  time  and  performance  standards  should  account  for  such  changes. 
HCFA  has  experience  with  these  issues  through  its  capitation  payment  system,  and  we  borrow 
■  from  some  methods  already  used  by  HCFA.  Finally,  GVPS  could  encourage  physicians  to 
manage  all  Medicare  services  for  their  patients.  Thus,  the  policy  coyld  embody  a  vision  for 
physicians  to  manage  their  patients,  not  just  their  own  practices  or  only  professional  and  supplier 
services. 

a.  The  Measure  of  Utilization:  RPUPS 

We  measure  average  resource  consumption  at  the  provider  level  by  Reimbursements  Per 
Unique  Patient  Seen  (RPUPS).  In  the  denominator  of  this  ratio  are  the  Medicare  beneficiaries 
who  receive  physician  services  from  the  group  during  the  calendar  year.  Although  beneficiaries 
may  be  informed  about  GVPS,  we  presume  there  would  not  be  an  enrollment  requirement.  In  the 
numerator  are  Medicare  reimbursements  to  all  providers  seen  by  these  beneficiaries  during  the 
calendar  year,  for  the  services  included  in  the  measure.  Two  scopes  of  service  are  contemplated 
for  the  GVPS  option:  those  services  currently  under  MVPS,  and  all  Medicare-covered  services. 
In  either  case,  providers  are  reimbursed  for  services  according  to  all  of  the  applicable  prevailing 
payment  policies,  including  the  Medicare  Fee  Schedule  for  physician  services,  the  hospital 
Prospective  Payment  System,  etc. 

The  values  of  RPUPS  range  widely  among  providers.  For  the  78  providers  in  this 
analysis,  the  proportion  of  all  Medicare  reimbursements  in  1992  that  were  for  physician  and 
supplier  services  averaged  25  percent  of  the  total  for  all  Medicare  services  used  by  their  patients, 
and  ranged  from  15  to  39  percent.  For  patients  seen  by  a  particular  provider,  the  share  of  all 
reimbursements  for  physician  and  supplier  services  that  went  to  that  provider  averaged  1 8 
percent,  and  ranged  from  2.9  percent  to  52.9  percent.  We  call  this  the  Patient  Capture  Ratio 
(PCR).  •• 

b.  The  Performance  Standards 

GVPS  would  compare  resource  consumption  in  a  given  year  to  a  target  level  or 
performance  standard  that  is  derived  from  resource  consumption  levels  (i.e.,  RPUPS)  for  a  base 
year,  multiplied  by  a  specified  percentage  rate  of  increase.  Targets  could  be  set  on  a  year-to-year 
basis,  using  the  most  recent  observed  RPUPS  as  a  base.  However,  this  has  two  disadvantages. 
First,  groups  would  have  difficulty  realizing  substantial  savings  if  performance  standards  were 
"ratcheted  down"  each  year  on  the  basis  of  earlier  successes.  Second,  groups  may  have 
incentives  to  generate  excessive  utilization  in  some  years  alternating  with  years  of  lower 
utilization  and  apparent  but  artificial  "savings."  Preferably,  targets  could  be  updated 


V 


cumulatively  from  the  level  of  RPUPS  observed  in  a  specified  base  year,  without  regard  to 
intermediate  values  of  RPUPS.  This  would  allow  groups  to  benefit  from  implementing  systems 
that  continue  to  keep  utilization  rates  lower,  similar  to  Medicare  capitation  payments  to  HMOs. 
We  explore  methods  to  adjust  for  differences  in  a  provider's  case  mix  between  the  base  year  and 
performance  year. 

Rates  of  growth  varied  among  market  areas.  Between  1991  and  1993,  rates  of  growth  in 
total  Medicare  reimbursements  per  patient  (unadjusted  for  case  mix)  ranged  from  6  percent  to  24 
percent.  For  physician  and  supplier  services,  rates  of  growth  ranged  from  minus  1 .2  percent  to  8 
percent.  Differences  across  markets  are  an  issue  confronted  by  HCFA  in  setting  payment  rates 
for  all  providers,  including  HMO  risk  contractors.  We  propose  methods  similar  to  HCFA's 
geographic  adjustment  for  capitation  payment  rates,  which  are  based  on  the  beneficiary's  county 
of  residence. 

Figure  ES-1  shows  how  rates  of  growth  at  the  provider  level  compare  to  rates  at  the 
respective  market  level.  The  origin  of  the  axes  represents  a  perfect  prediction  at  the  provider 
level,  based  on  changes  at  the  market  level.  The  horizontal  axis  shows  deviations  from  the  target 
when  RPUPS  is  defined  to  include  physician  and  supplier  services  only;  the  vertical  axis  shows 
deviations  from  the  target  when  RPUPS  is  defined  to  include  all  Medicare  services.  Thus,  points 
that  are  toward  the  left,  and  toward  the  bottom  of  the  figure,  are  providers  with  lower  rates  of 
increase. 

We  interpret  the  substantial  clustering  of  points  within  10  percent  of  the  market 
prediction  to  indicate  a  strong  tendency  for  RPUPS  to  be  stable  at  the  provider  level.  For  the 
most  part,  points  outside  the  cluster  (such  as  Points  A  and  B)  are  providers  that  experienced  very 
large  changes  in  the  number  of  beneficiaries  seen  during  these  years  (e.g.,  a  50  percent  change). 
We  regard  these  instances  as  neither  data  nor  policy  problems.  Rather,  they  indicate  that  groups 
will  need  to  inform  HCFA  about  changes  in  their  composition  over  time  (e.g.,  mergers  and 
divestitures).  When  measuring  performance,  HCFA  can  account  for  these  transitions  by 
adjusting  baseline  levels  or  performance  standards. 

c.        Rewards  and  Penalties 

If  the  observed  RPUPS  in  a  performance  year  is  less  than  the  target,  the  rate  of  growth  in 
average  resource  consumption  is  lower  than  the  rate  specified  by  the  Federal  government. 
Differences  between  expected  and  actual  reimbursement  rates  for  a  provider's  patients  are 
deemed  to  be  savings  attributable  to  changes  in  relative  efficiency.  Multiplying  by  the  number  of 
Medicare  patients  involved  in  measuring  the  average  reimbursements  per  patient  produces  an 
estimate  of  total  Medicare  Savings  due  to  changes  in  the  provider's  relative  efficiency.  If 
RPUPS  refers  to  professional  and  supplier  services  only  (i.e.,  MVPS  services),  the  estimated 
Medicare  Savings  will  refer  only  to  those  services.  RPUPS  also  could  encompass  all  Medicare- 
covered  services,  and  savings  would  be  estimated  accordingly. 


Figure  ES-1:  Deviations  from  Targets  for  78  Providers  in  10  Marl<et  Areas:  1991  to  1992' 


J3 


3 
XI 

E 
cc 

I 

I 

E 
g 
m 

I  -a 
I 

0) 


II 


-0.2 


0.4 


0.3 


0.2 


O.H- 


♦  t  ♦ 

-0.1  ♦tt*>i'* 

-0.1*^ 


♦  ♦ 


-0.2 


♦ 


♦  > 


0.1 


0.2 


0.3 


0.4 


Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements 

Source:  NCH  file,  1991  and  1992. 


If  the  value  of  Medicare  Savings  is  positive,  the  group  has  demonstrated  improvement  in 
relative  efficiency.  If  the  value  is  negative,  the  group  has  not  met  HCFA's  budget  goals.  A 
value  of  zero  means  the  group  has  met  its  target  exactly;  in  other  words,  the  group  has  met 
HCFA's  budget  goals  for  the  average  provider.  These  outcomes  can  be  addressed  in  the  payment 
system  through  policies  that  define  rewards  and  penalties. 

In  the  proposed  GVPS  models,  HCFA  would  retain  its  policy  of  setting  uniform 
conversion  factors  for  all  phycicians.  The  GVPS  pa}'ment  system  would  distinguish  between 
physician  groups  in  terms  of  relative  efficiency  by  giving  lump  sum  reward  payments  to  . 
successftil  groups.  At  a  minimum,  the  reward  would  be  based  on  the  actuarial  value  of  any 
national  fee  penalties.  HCFA  could  "refund"  the  value  of  lost  revenues  resulting  from  the 
national  penalties  to  groups  that  operated  within  their  targets.  In  addition,  GVPS  could  result  in 
rewards  based  on  savings  to  Medicf.re  and/or  specific  penalties  for  failing  to  meet  performance 
standards.  Penalty  amounts  could  be  withheld  from  future  fee-for-service  payments  to  the  group. 

The  value  of  additional  rewards  (and  penalties)  could  be  a  function  of  several  potential 
factors,  beginning  with  the  estimated  Medicare  Savings.  We  recommend  that  Medicare  Savings 
be  calculated  on  the  basis  of  all  Medicare  services,  not  just  physician  and  supplier  services.  It 
would  be  desirable  and  appropriate  for  Medicare  to  retain  a  portion  of  the  savings.  For  reasons 
of  equity  and  appropriate  incentives,  the  physician  group  also  could  receive  a  portion  of  the 
savings,  i.e.,  a  reward.  Because  incentives  and  savings  apply  to  reimbursements  to  all  providers, 
one  gauge  for  reward  payments  to  the  group  is  its  PCR,  i.e.,  the  proportion  of  Medicare 
reimbursements  for  services  provided  to  its  patient  population.  The  result  would  be  "virtual 
capitation"  to  the  group  for  its  share  of  the  patient  population.  Groups  would  have  incentives  to 
maximize  savings  and  to  increase  their  share  of  services  provided  to  their  patients.  HCFA  may 
choose  other  criteria  for  sharing  savings  (such  as  a  specified  Sharing  Rate)  instead  of,  or  in 
addition  to  the  Patient  Capture  Ratio.  We  recommend  that  rewards  be  equal  to  a  refiind  of  the 
lost  revenues  due  to  reduced  fee  updates  under  MVPS,  plus  75  percent  of  the  product  of  the 
estimated  savings  and  the  group's  PCR. 

Paying  rewards  for  the  success  of  groups  raises  questions  about  financing  and  budget 
neutrality.  For  savings  and  rewards  related  to  MVPS  services,  HCFA  still  could  use  the  national 
MVPS  to  calculate  universal  penalties.  In  those  calculations,  the  Medicare  Savings  amount  (for 
MVPS  services)  attributed  to  groups  operating  under  GVPS  could  be  added  to  the  national 
aggregate  expenditure  totals.  This  would  base  national  penalties  on  the  performance  of  providers 
outside  of  GVPS.  Providers  under  GVPS  would  receive  the  same  conversion  factors,  reflecting 
the  penalties,  but  the  difference  would  be  offset  by  the  lump  sum  payments. 

For  other  types  of  services  (i.e.,  not  covered  under  MVPS),  the  Federal  government  also 
has  processes  for  determining  increases  in  payment  rates.  The  context  for  making  those 
determinations  presumably  includes  budget  considerations,  although  there  is  no  structiire  that  is 


viii 


parallel  to  MVPS.  HCFA  may  implicitly  disregard  estimated  savings  under  GVPS  when  it 
makes  these  determinations,  effectively  creating  a  parallel  situation  in  which  the  burden  of 
financial  penalties  is  concentrated  on  providers  outside  the  umbrella  of  managed  care  under 
GVPS. 

d.       Three  Prototype  Models 

Table  ES-1  presents  three  model  variations  for  GVPS.  These  three  models  are  presented 
to  illustrate  important  policy  parameters  regarding  the  scope  of  services  and  the  incentive 
structure.  Model  1  uses  only  professional  and  supplier  services  in  the  definitions  of  RPUPS  and 
Medicare  Savings,  while  Models  2  and  3  refer  to  all  Medicare-covered  services.  Models  1  and  2 
carry  reward  potential  only,  with  no  specific  penalties  for  failing  to  meet  performance  standards, 
whereas  Model  3  carries  potential  rewards  and  penalties.  We  recommend  Model  2  because  we 
want  to  encourage  participation  by  groups,  and  want  to  encourage  the  groups  to  manage  total 
patient  care. 

The  formulas  given  in  Table  ES-1  for  reward  and  penalty  amounts  are  illustrative.  In 
each  of  the  models,  the  formulas  refer  to  the  entire  scope  of  services  used  to  define  RPUPS.  A 
model  that  includes  provisions  for  specific  penalties  might  share  greater  proportions  of  savings 
with  the  group.  However,  the  formula  for  rewards  and  penalties  need  not  be  entirely  symmetric. 
Furthermore,  HCFA  may  decide  to  avoid  or  strictly  limit  the  potential  penalties,  given  the 
absence  of  patient  "lock-in"  provisions  to  control  utilization.  Model  1  would  give  rewards  to 
groups  equal  to  any  refiands  for  reduced  fee  updates  plus  (Medicare  Savings  x  Patient  Capture 
Ratio  X  0.75).  As  discussed  above,  multiplying  by  the  PCR  provides  a  usefiil  estimate  of  the 
reimbursements  that  might  have  been  paid  to  the  group,  had  they  not  improved  overall 
efficiency.  The  Sharing  Rate  of  0.75  represents  a  compromise  between  zero,  which  reflects 
traditional  fee-for-service,  and  unity,  which  conveys  a  "virtual  capitation"  scenario. 

Model  2  would  base  reward  payments  on  all  Medicare-covered  services,  with  amounts 
equal  to  any  refiinds  for  reduced  fee  updates  plus  (Medicare  Savings  x  Patient  Capture  Ratio  x 
0.75).  Model  3  carries  higher  potential  rewards,  equal  to  any  refiands  for  reduced  fee  updates 
plus  (Medicare  Savings  x  Patient  Capture  Ratio  x  0.95),  and  would  account  for  negative 
Medicare  Savings  estimates  through  a  penalty  equal  to  (Medicare  "Losses"  x  Patient  Capture 
Ratio  X  0.10).  This  would  move  toward  a  virtual  capitation  approach. 

5.       Eligibility  Criteria 

To  a  certain  extent,  criteria  for  eligibility  depend  on  the  purposes  of  GVPS.  For  basic 
purposes,  such  as  enhancing  equity  in  payment  or  applying  incentives  for  efficiency  as  broadly 
as  possible,  HCFA  may  specify  only  a  few  criteria.  These  could  include  requiring  formal 
contractual  agreements  among  providers  that  operate  under  a  single  performance  standard, 
specifying  minimum  sizes  (e.g.,  number  of  beneficiaries  served).  We  suggest  criteria  such  as  a 
minimum  of  8,000  Medicare  patients  seen  per  year,  a  minimum  PCR  of  20  percent  (for  physician 


ix 


Table  ES-1:  Summary  of  Three  Model  Variations 

Model  1 

Model  2 

Model  3 

Services  in 

Volume  Measure: 

MVPS 

All  Medicare 

All  Medicare 

Formula  for 

Sharing  Savings: 

MVPS: 

(MS  X  PGR  X  0.5) 

(MS  X  PGR  X  0.75) 

(MS  X  PGR  X  0.95) 

Other: 

None 

(MS  X  PGR  X  0.75) 

(MS  X  PGR  X  0.95) 

Formula  for 

Penalties: 

MVPS: 

None 

None 

(MS  X  PGRx  0.10) 

Other: 

None 

None 

(MS  X  PGR  X  0.10) 

MVPS  services  include  most  Part  B  professional  and  supplier  services,  and  exclude 
outpatient  department  facility  costs,  ambulance  services  and  durable  medical  equipment. 


MS  refers  to  the  estimated  Savings  for  the  group;  PGR  is  the  Patient  Gapture  Ratio, 
which  is  the  proportion  of  all  patients'  Medicare  reimbursements  that  were  to  the  group. 


X 


services),  and  minimum  Medicare  reimbursements  of  $100,000  per  year  for  evaluation  and 
management  physician  services. 

HCFA  may  consider  more  restrictive  criteria  for  two  reasons.  First,  HCFA  may  want  to 
limit  the  number  of  participants.  This  could  lessen  the  overall  administrative  burden  and 
concentrate  resources  on  larger  and  more  propitious  sites.  HCFA  could  undertake  a  definitive 
assessment  of  a  group's  capacity  to  manage  the  full  range  of  Medicare-covered  services.  This 
may  require  several  layers  of  criteria  relating  to  the  composition  of  the  group,  accessibility 
standards,  quality  of  care  standards,  patient  management  practices,  and  information  systems. 

6.  Provider  Responses 

If  the  Federal  government  made  GVPS  available,  providers  across  the  country  would 
need  to  make  a  number  of  decisions  in  response.  First,  they  could  assess  their  interest  and  their 
ability  to  meet  eligibility  criteria.  Most  would  have  to  pool  their  efforts  with  other  providers  in 
order  to  meet  criteria  relating  to  size  and/or  scope  of  services. 

Operating  under  GVPS,  a  group  may  make  different  decisions  depending  on 
characteristics  of  its  patient  population.  For  example,  a  group  that  focuses  on  primary  care  may 
have  to  ally  itself  with  providers  of  more  specialized  care.  A  group  that  already  provides  a  full 
range  of  services  and  a  large  portion  of  care  to  its  patients  may  focus  on  managing  the  services  it 
provides  and  expanding  the  number  of  Medicare  patients  it  sees.  Under  the  proposed  models, 
groups  would  have  incentives  to  control  the  volume  and  intensity  of  their  own  services,  and  to 
influence  the  services  their  own  patients  receive  from  other  providers. 

7.  Economic  Consequences  of  GVPS 

We  simulate  the  economic  consequences  of  implementing  GVPS  on  three  parties: 
Medicare,  GVPS  groups,  and  other  physician  practices.  Economic  consequences  result  fi-om 
changes  in  total  Medicare  reimbursements  for  applicable  services,  plus  any  reward  payments. 
The  simulation  model  concerns  the  specific  effects  of  GVPS  on  reimbursements  for  all  Medicare 
services  (Parts  A  and  B)  over  a  time  frame  of  five  years. 

Table  ES-2  presents  results  of  the  simulation  for  the  base  case  scenario,  and  contrasts 
them  with  projected  results  in  the  absence  of  GVPS.  We  assume  that  GVPS  groups  see  10 
percent  of  all  beneficiaries  that  use  services,  realize  lower  utilization  rates,  and  experience  a 
slower  than  average  rate  of  growth.  Under  GVPS,  participating  groups  lose  $1,988  billion  in 
reimbursements  in  year  5  (12.92%  of  what  they  would  have  received  without  GVPS).  This  loss 
is  more  than  offset  by  a  reward  of  $2,509  billion  for  their  success  in  meeting  targets.  With  the 
reward,  the  groups  are  3.38  percent  better  off  with  GVPS  than  without.  The  non-GVPS 
providers  also  face  lower  reimbursements  under  GVPS,  but  the  losses  are  spread  over  a  much 
larger  base,  and  therefore  only  account  for  2.73  percent  of  their  year  5  reimbursements  without 
GVPS.  Finally,  Medicare  saves  2.44  percent  of  total  reimbursements  for  year  5  with  GVPS 
($7,709  billion),  since  higher  payments  to  groups  under  GVPS  are  more  than  offset  by  lower 
payments  to  other  providers. 


xi 


Table  ES-2 

Distribution  of  payments  with/without  GVPS 
Scenario:  GVPS  Base  Case* 


Payments  ($M)  in  Year  5 

Scenario 

Difference  (%  change)  with  GVPS 

GVPS 

No  GVPS 

Reimbursements  to  GVPS  groups 
Reward  payments  to  GVPS  groups 

13,403 
2,509 

15,391 
0 

-1,988  (-12.92) 
+2,509 

Total  group  income 

15,912 

15,391 

+521  (+3.38) 

Reimbursements  to  non-GVPS  providers 

292,887 

301,116 

-8,230  (-2.73) 

Total  payments  by  Medicare 

308,798 

316,507 

-7,709  (-2.44) 

*  GVPS  groups  see  10%  of  beneficiaries  that  tise  services  in  every  year 


xii 


Table  ES-3  examines  the  sensitivity  of  our  results  to  various  changes  in  the  policy 
parameters.  It  may  be  seen  that  increasing  the  sharing  rule  from  75  percent  to  95  percent  reduces 
slightly  the  total  payments  by  Medicare  in  year  5.  However,  it  increases  the  groups'  gain  from 
implementation  of  GVPS,  from  3.38  percent  to  7.18  percent  above  their  reimbursement  total 
without  GVPS. 

Of  greater  importance  is  the  rebasing  rule.  The  use  of  armual  rebasing  would  make 
GVPS  a  money-loser  for  the  groups,  reducing  their  revenues  9.64  percent  below  the  GVPS  base 
case  fifth  year  amount  of  $15,912  billion.  This  reflects  the  ratchet  effect  of  continually  adjusting 
targets  based  on  actual  performance.  However,  the  groups'  loss  in  this  case  is  not  a  gain  for 
Medicare.  Instead,  the  benefits  accrue  to  non-GVPS  providers,  who  receive  higher  updates  (and 
therefore  smaller  revenue  losses)  than  they  would  otherwise.  This  is  because  rebasing  reduces 
measured  savings,  and  therefore  reduces  the  rewards  to  GVPS  groups  which  would  otherwise  be 
financed  through  lower  updates. 

If  the  groups  reduced  their  volume  growth  to  4.5  percent  instead  of  6.5  percent  used  in 
the  base  case,  they  would  increase  their  income  in  year  5  by  1 .67  percent  of  the  level  the  groups 
would  receive  if  there  were  no  GVPS.  The  income  gain  is  smaller  than  the  3.38  percent  achieved 
in  the  GVPS  base  case  scenario.  This  suggests  that  the  additional  rewards  for  curbing  utilization 
more  tightly  are  ultimately  outweighed  by  the  loss  of  fee-for-service  reimbursements.  Using  the 
4.5  percent  growth  assumption,  Medicare  would  save  2.93  percent  of  year  5  payments  without 
GVPS,  compared  to  2.44  percent  savings  in  the  GVPS  base  case  with  6.5  percent  utilization 
growth. 

Alternatively,  if  the  GVPS  groups  increased  their  PGR  by  2  percent  per  year  in  addition 
to  achieving  the  baseline  utilization  savings  for  Medicare,  they  would  greatly  increase  their  fee- 
for-service  reimbursements.  In  this  scenario  variation,  the  groups'  revenues  in  year  5  would  be 
29.3  percent  higher  than  without  GVPS.  For  Medicare,  this  scenario  results  in  a  0.09  percentage 
point  larger  payment  reduction  than  the  GVPS  base  case  because  care  is  being  transferred  from 
non-GVPS  to  GVPS  group  providers,  who  are  presumed  to  better  control  utilization  grov^. 
Furthermore,  if  groups  see  25  percent  of  beneficiaries.  Medicare  payments  in  year  5  are 
approximately  $19.8  billion  below  their  projected  level  with  no  GVPS  program.  This  represents 
a  6.38  percent  savings  for  Medicare. 

8.       Conclusions  and  Recommendations 

Medicare  has  experienced  large  increases  in  spending  during  recent  years,  and  most 
projections  suggest  these  increases  could  continue.  Policymakers  have  debated  the  merits  of 
regulation,  such  as  rate  setting,  versus  market-oriented  solutions,  such  as  managed  care.  We 
believe  that  the  regulatory  framework  established  for  MVPS  is  usefiil  for  achieving  budgetary 
goals.  However,  we  also  believe  it  would  be  useful  to  supplement  the  current  system  with 
economic  incentives  that  encourage  the  management  of  services.  Many  physicians  and 
administrators  who  contributed  to  this  study  commented  that  incentives  under  the  traditional  fee- 


Table  ES-3 


Effect  of  Varying  Program  Impacts  on  Payments  Under  GVPS 
GVPS  Groups  see  10%  of  Beneficiaries  that  Use  Services 


Varying  Assumptions 

Payments  ($M)  in  Year  5 

Percent  Change  from  No 
GVPS 

Scenario 

Groups' 
Utilization 
Growth 
Rate 

Annual 
Increase 

in 

Capture 

Groups' 
Share  of 
Savings 

Annually 
Rebase 
Groups' 
Targets? 

To 
Groups 

To 
Others 

Total 

Groups 

Others 

Total 

No  GVPS 

15,391 

301,116 

316,507 

GVPS  Base  Case 

6.5% 

0 

75% 

No 

15,912 

292,887 

308,798 

+3.38 

-2.73 

-2.44 

Variants 

Vary  Savings  Share 

6.5% 

0 

95% 

No 

16,497 

291,401 

307,898 

+7.18 

-3.23 

-2.72 

Vary  Rebasing  Rule 

6.5% 

0 

75% 

Yes 

13,907 

296,665 

310,572 

-9.64 

-1.48 

-1.88 

Vary  Utilization  Growth 

4.5% 

0 

75% 

No 

15,648 

291,570 

307,218 

+  1.67 

-3.17 

-2.93 

Vary  Capture  Growth 

6.5% 

2% 

75% 

No 

19,900 

288,593 

308,494 

+29.30 

-4.16 

-2.53 

xiv 


for-service  payment  system — with  or  without  MVPS — were  out  of  step  with  their  current  efforts 
to  manage  care  and  improve  efficiency. 

Managing  services  may  result  in  lower  utilization  rates  and  large  savings,  but  bringing 
beneficiaries  into  managed  care  envirorunents  can  be  difficult.  Medicare  risk  contracts  with 
HMOs  offer  one  opportunity.  Capitation  can  create  incentives  for  efficiency  that  encourage 
managed  care.  However,  continuing  participation  by  an  HMO  is  largely  contingent  on  positive 
financial  results.  In  turn,  enrollment  by  Medicare  beneficiaries  into  an  HMO  is  contingent  on 
better  benefits  and/or  lower  premiums  than  competing  Medicare  supplemental  policies.  The 
current  system  pays  HMOs  95  percent  of  estimated  costs  and  therefore  could  save  Medicar^^  up 
to  5  percent  for  enrollees.  Unfortunately,  Medicare  saves  less  than  5  percent,  or  even  loses 
money,  in  cases  where  the  average  cost  estimates  are  too  high  because  of  favorable  selection. 

We  hypothesize  that  Medicare  could  achieve  greater  savings  from  GVPS  than  from  the 
capitation  system: 

►  First,  the  chances  of  Medicare  losing  money  are  less  under  GVPS  because  the 
performance  standards  are  based  on  the  experience  of  the  group.  In  contrast,  capitation 
embodies  "performance  standards"  that  may  have  little  correspondence  to  actual 
enrollees.  Although  there  is  always  error  associated  with  estimating  expected  costs,  the 
experience  of  a  group's  own  patients  may  be  a  more  valid  basis  than  the  experience  of 
other  providers'  patients. 

►  Second,  the  financial  benefits  of  managing  care  can  be  shared  more  evenly  under  GVPS. 
The  formulas  for  sharing  the  savings  can  give  ample  incentives  and  rewards  to  groups, 
yet  still  allow  Medicare  to  benefit  substantially.  Under  capitation,  any  savings  to 
Medicare  are  capped  at  5  percent  of  mean  reimbursement  levels.  Under  GVPS,  Medicare 
can  keep  the  majority  of  savings  for  patients  seen  by  most  groups. 

►  Third,  under  GVPS  groups  have  incentives  to  serve  and  manage  expensive  Medicare 
patients.  Providers  paid  under  fee-for-service  are  encouraged  to  seek  and  retain  patients 
most  in  need  of  services.  Capitated  health  plans  have  incentives  to  seek  and  retain 
relatively  healthy  members,  not  patients. 

We  also  see  advantages  of  GVPS  over  state-level  MVPS  and  penalizing  hospital  medical 

staffs: 

►  Our  analysis  suggests  that  increases  in  Medicare  costs  are  more  pronounced  for  Part  A 
and  other  non-MVPS  services.  It  would  seem  worthwhile  to  pursue  comprehensive 
policies  that  embrace  all  services.  Under  GVPS,  HCFA  can  follow  reforms  in  the 
industry  and  encourage  management  of  all  services.  Policies  addressing  MVPS  services 
within  states,  or  physician  services  within  the  hospital,  are  relatively  narrow  and  not 
aimed  at  the  major  problem  areas  or  most  promising  solutions. 


XV 

►  Also  worthwhile  would  be  coherent  polices  that  link  appropriate  incentives  to  the 
responsible  decision-makers.  We  believe  physician  groups  are  the  optimal  focal  points 
for  comprehensive  and  coherent  Medicare  payment  policies.  Based  on  what  we  found, 
there  are  physician  groups  willing  to  accept  the  challenge. 

►  In  different  ways,  state-level  MVPS  and  hospital  medical  staff  policy  options  are  subsets 
of  potentially  more  comprehensive  GVPS  policies.  Setting  regional  or  local  performance 
standards  is  one  necessary  step  in  establishing  a  GVPS  option,  which  completes  the 
process  by  giving  ince^+ives  to  providers  to  respond.  Hospital  medical  staffs  are 
potential  candidates  for  GVPS,  which  could  give  them  incentives  to  manage  ambulatory 
and  institutional  services. 

HCFA  has  several  parameters  to  consider  for  GVPS,  involving  various  tradeoffs.  A 
significant  decision  is  whether  to  stay  with  the  scope  of  physician  and  supplier  services.  Other 
decisions  have  to  do  with  the  level  of  complexity  to  build  into  the  algorithms  for  setting 
standards  and  measuring  performance.  Also,  decisions  are  needed  about  the  appiopriate  balance 
between  incentives  to  participate,  and  incentives  for  efficiency  among  those  who  participate. 

►  HCFA  has  the  administrative  capacity  and  relevant  data  to  implement  GVPS  for 
physician  and  supplier  services,  or  for  all  Medicare  services.  Most  of  the  administrative 
burden  lies  with  the  physician  services  because  of  their  large  numbers.  Ironically,  adding 
the  other  categories  of  services  increases  the  administrative  burden  relatively  little,  but 
greatly  increases  the  scope  of  the  incentives  and  potential  savings.  We  recommend 
basing  GVPS  on  all  services.  For  non-MVPS  services,  projections  used  in  setting 
capitation  rates  for  HMOs  could  also  be  used  to  set  performance  standards  for  groups. 

►  There  are  a  number  of  potential  refinements  and  variations  discussed  in  this  report. 
Again,  they  would  involve  data  and  capacity  that  HCFA  already  has,  but  would  add  to  the 
number  of  steps.  The  value  of  methods  to  dampen  stochastic  effects  must  be  considered 
in  light  of  selected  criteria  for  participation.  Allowing  medium  sized  groups  to 
participate,  for  example,  may  add  to  the  value  of  refinements.  We  recommend  that  health 
status  adjusters  be  employed,  but  further  consideration  is  needed  about  which  categories 
to  use. 

►  Groups  should  be  given  incentives  for  improving  efficiency.  These  incentives  could  be  in 
the  form  of  rewards  and/or  penalties.  Although  penalties  may  strengthen  incentives  for 
efficiency,  we  believe  that  interest  in  participation  would  be  greatly  reduced  by  the 
prospect  of  losing  money.  Assuming  that  HCFA  is  willing  to  set  cumulative  performance 
standards,  we  recommend  that  concentrated  penalties  not  be  included.  Failure  to 
capitalize  on  an  opportunity  to  manage  care  and  earn  rewards  is  itself  a  sufficient  penalty, 
as  is  rising  above  a  cumulative  target  and  diminishing  chances  for  future  rewards.  Giving 


xvi 

positive  incentives  similar  to  capitation,  and  allowing  HCFA  to  share  in  the  savings, 
could  reap  significant  benefits  for  Medicare  and  participating  groups. 

Based  on  these  considerations,  we  recommend  that  HCFA  consider  models  with 
parameters  such  as  the  following: 

►  Establish  eligibility  criteria,  such  as  groups  with  primary  care  physicians  and  specialists 
serving  about  8,000  or  more  beneficiaries  per  year,  and  a  PGR  of  at  least  20  percent  for 
physician  services. 

►  For  GVPS  beginning  within  the  next  year,  say  early  in  1996,  choose  1994  as  the  base 
year. 

►  Measure  utilization  as  RPUPS  based  on  all  Medicare  services. 

►  Establish  performance  standards  using  the  counties  where  at  least  5  percent  of  the  group's 
patients  reside.  These  are  cumulative,  meaning  annual  increases  are  applied  to  the 
previous  target,  not  the  most  recent  actual  RPUPS.  Adjust  the  performance  standard  each 
year  for  changes  in  case  mix  from  the  base  year. 

►  Pay  successful  groups  a  lump  sum  reward  consisting  of  a  refund  for  revenues  lost  from 
national  fee  penalties,  plus  75  percent  of  the  product  of  estimated  Medicare  Savings  times 
the  PGR.  Pay  rewards  to  a  group  for  successfiil  performance  only  if  its  cumulative 
Medicare  savings,  i.e.,  since  beginning  to  operate  under  GVPS,  are  positive. 


Penalize  unsuccessfiil  groups  only  through  any  applicable  national  fee  penalties. 


1 


I.  Purpose 

The  Health  Care  Financing  Administration  (HCFA)  has  periodically  reformed  Medicare's 
payment  systems  to  help  control  costs.  Price  setting  systems  for  hospital  and  physician  services 
are  notable  examples.  However,  to  control  aggregate  expenditures  HCFA  also  must  control  the 
volume  and  intensity  of  services.  Many  payers  have  adopted  managed  care  techniques  including 
utilization  management,  selective  provider  contracting,  and  financial  incentives.  The  policy 
options  presented  in  this  report  could  help  propel  the  Medicare  program  into  managed  care  and 
toward  long  run  cost  control. 

In  1989,  the  Federal  govenmient  initiated  physician  payment  reform  with  legislation 
calling  for  the  Medicare  Fee  Schedule  (MFS)  based  on  a  Resource-Based  Relative  Value  Scale 
(RBRVS).  To  address  volume  and  intensity,  the  legislation  established  the  Medicare  Volume 
Performance  Standard  Rates  of  Increase  (MVPS),  which  link  physician  fee  updates  to  aggregate 
national  Medicare  expenditure  outcomes  for  physician  and  supplier  services.  This  research  is 
intended  to  help  HCFA  explore  alternatives  to  the  current  national  MVPS,  responding  to  three 
basic  problems: 

►  Physicians  have  weak  economic  incentives  to  be  efficient  because  individual 
performance  is  aggregated  with  the  rest  of  the  nation. 

HCFA  partitions  services  into  separate  volume  performance  standards  for  surgical, 
primary  care  and  other  services.  However,  Medicare-covered  services  delivered  by  all 
physicians  in  the  country  are  aggregated  into  national  pools.  This  approach  gives  weak 
financial  incentives  for  providers  to  manage  the  volume  and  intensity  of  services  because 
individual  performance  does  not  affect  discemibly  the  national  performance. 

►  If  national  standards  are  exceeded,  physicians  who  are  relatively  efficient  get 
penalized  as  //"their  own  performance  was  average. 

In  spite  of  the  weak  incentives  under  Medicare,  some  physicians  practice  more  efficiently 
than  others.  This  can  result  from  differences  in  education,  organization  of  practice, 
incentives  given  by  other  payers,  etc.  Medicare  expenditure  levels  reflect  the  combined 
or  average  behavior  of  the  relatively  efficient  and  inefficient  physicians.  Blanket  fee 
penalties  do  not  differentiate  between  physicians  in  terms  of  their  relative  efficiency. 

►  Over  many  years,  shrinking  Medicare  payment  levels  relative  to  other  payers  may 
threaten  beneficiaries'  access  to  physician  services. 

If  the  main  mechanism  for  expenditure  control  is  reducing  physicians'  Medicare  fee 
levels,  physicians  may  become  less  willing  to  accept  Medicare  patients.  This  unfortunate 
dynamic  may  occur  without  causing  any  general  improvements  in  the  cost-effectiveness 


2 


of  service  delivery  patterns.  Physicians'  fees  account  for  a  distinct  minority  of  total 
Medicare  expenditures,  but  physicians  make  the  decisions  that  affect  most  of  the 
remaining  services. 

This  report  discusses  refinements  to  the  national  MVPS  to  allow  qualified  physician 
groups  to  elect  separate  annual  performance  standard  rates  of  increase  other  than  the  national 
standard  established  for  the  year.  Under  the  proposed  models,  called  Group-Specific  Volume 
'  Performance  Standards  (GVPS),  HCFA  would  track  the  annual  reimbursement  rates  of  Medicare 
beneficiaries  seen  by  physician  groups.  The  observed  rates  of  increase  would  be  compared  to 
performance  standards  to  determine  whether  or  not  the  group  was  contributing  to  lower  giuvvth 
rates  in  Medicare  spending. 

This  approach  could  encourage  physicians  to  elect  group-specific  performance  standard 
rates  of  increase  and  give  incentives  for  improvements  in  efficiency.  Moreover,  incentives  under 
GVPS  can  be  expanded  to  all  Medicare-covered  services.  Accordingly,  physicians  can  be 
rewarded  for  managing  all  of  their  Medicare  patients'  services. 

n.      Overview  of  the  Project  and  Report 

A.       The  Project 

This  is  the  final  report  for  a  three-year  project  intended  to  advise  HCFA  about  separate 
performance  standards  for  physician  groups.  The  project  has  set  out  to: 

►  Develop  and  analyze  methods  for  measuring  resource  consumption  at  the  provider  level 
and  for  setting  group-specific  performance  standards, 

►  Develop  and  recommend  criteria  for  determining  whether  a  physician  group  is  qualified 
to  elect  separate  performance  standards, 

►  Consider  the  administrative  requirements  for  HCFA  to  implement  group-specific  volume 
performance  standards, 

►  Describe  how  a  physician  group  may  operate  under  separate  performance  standards,  and 

►  Simulate  policy  implications  of  important  model  parameters. 

We  have  continued  to  develop  conceptual  models  described  in  reports  from  previous 
projects  sponsored  by  HCFA  (Wallack  et  al.,  1991 ;  Tompkins  et  al.,  1992).  In  the  earlier  work, 
we  conducted  empirical  analyses  of  Medicare  expenditure  patterns  for  quasi-random  samples  of 
physician  providers,  using  the  Provider  ID  Number  (i.e.,  billing  number)  to  define  providers. 


3 


For  this  project  we  combined  many  aspects  of  the  model  development  and  empirical 
analyses.  We  established  an  informal  advisory  committee  consisting  of  representatives  from  a 
dozen  physician  organizations  in  different  areas  of  the  country.  Through  periodic  meetings, 
conference  calls  and  written  correspondence  these  groups  gave  us  usefiil  reactions  and  insights 
throughout  much  of  the  project.  In  addition,  we  constructed  data  samples  using  these  groups  as 
main  sites  and  other  providers  in  the  same  market  areas  as  additional  observations  in  our 
secondary  data  analyses. 

The  advisory  committee  included  large  multispecialty  groups  with  reputations  for 
delivering  high  quality  of  care  and  having  strong  management  capability  aimed  at  integration. 
The  organizations  that  assisted  us  are: 

•  Cleveland  Clinic  Foundation  (Cleveland,  OH) 

•  Fallon  Clinic  (Worcester,  Massachusetts) 

•  Geisinger  Clinic  (Danville,  PA) 

Henry  Ford  Health  System  (Detroit,  MI)  ^, 
Lahey  Clinic  Foundation  (Burlington,  Massachusetts) 
.  •         Lovelace  Clinic  (Albuquerque,  NM) 

Mayo  Foundation  (Rochester,  MN;  Scottsdale,  AZ;  Jacksonville,  FL) 

•  Ochsner  Clinic  (New- Orleans,  LA) 
Scott  «fe  White  Clinic  (Temple,  TX) 

Upper  Hudson  Primary  Care  Consortium  (Warrensburg,  NY) 

Together,  these  organizations  serve  urban  and  rural  market  areas,  and  range  in  emphasis  from 
primary  care  to  national  tertiary  care  referrals.  Many  also  sponsor  or  contract  with  health 
maintenance  organizations,  including  Medicare  risk  contractors. 

Our  data  samples  were  supplemented  with  other  physician  organizations  chosen  from  the 
same  market  areas  served  by  the  advisory  committee  members.  The  Medicare  National  Claims 
History  (NCH)  file  was  our  principal  source  of  data.  We  retrieved  claims  records  for  all 
Medicare  patients  seen  by  providers  in  the  sample  during  the  years  1991,  1992  and  1993.  In 
addition,  "we  obtained  similar  data  for  random  beneficiary  samples  from  the  same  market  areas  in 
order  to  estimate  market  level  trends. 

B.       The  Report 

The  first  part  of  this  report  presents  the  purpose  and  aims  of  the  study,  and  provides  some 
background  about  the  policy  context  for  GVPS.  Section  III  of  this  report  briefly  describes  some 
other  policy  options  to  control  expenditure  levels.  These  include  other  potential  refinements  to 
the  national  MVPS,  and  HMO  risk  contracting.  Section  IV  discusses  the  rationale  and  goals  for 
a  policy  of  Group-Specific  Volume  Performance  Standards.  These  include  objectives  for  HCFA 
and  objectives  that  may  exist  for  qualified  providers. 


4 


The  second  part  of  the  report  discusses  GVPS  models  for  implementing  performance 
standards  at  the  group  level.  Also  included  are  models  for  defining  incentive  structures  based  on 
the  group's  performance.  Section  V  summarizes  the  basic  approach  to  GVPS,  and  introduces 
key  terms  and  relationships.  The  section  describes  ma-"  "^odel  variations  together  with  related 
policy  issues.  Section  VI  describes  methods  for  measuring  resource  consumption  at  the  provider 
level.  Empirical  findings  are  presented  for  the  sample  providers.  We  consider  the  set  of  services 
currently  under  MVPS  (i.e.,  professional  and  supplier  services)  and  all  Medicare-covered 
services.  Section  VII  describes  methods  for  setting  performance  standards.  We  investigate 
differences  in  growth  rates  between  market  areas,  and  growth  rates  at  the  provider  level.  Model 
options  include  year-to-year  targets  and  cumulative  targets  projected  from  a  specific  base  year. 
Section  VIII  considers  specific  changes  to  the  payment  system  under  GVPS  that  could  affect  the 
incentive  structure  for  providers.  As  an  alternative  to  the  national  MVPS,  this  approach  could 
help  to  improve  equity  in  payments  and  to  encourage  efficiency  in  service  delivery.  We  consider 
the  potential  roles  of  economic  rewards  and  penalties. 

The  third  part  of  the  report  discusses  eligibility  criteria  for  participafion  under  GVPS, 
potential  provider  responses  to  GVPS,  and  results  from  simulations  of  the  economic 
consequences  of  GVPS.  Section  IX  discusses  criteria  that  HCFA  may  consider  for  assessing  the 
qualifications  of  physician  groups  and  their  eligibility  for  participafion  under  separate 
performance  standards.  We  begin  with  basic  criteria  relafing  to  the  validity  of  ufilization 
measures  and  performance  standards,  and  then  discuss  fiarther  criteria  related  to  potential  policy 
goals  of  HCFA  for  GVPS.  Section  X  anficipates  how  providers  may  respond  if  GVPS  were 
implemented.  Groups  must  consider  whether  to  elect  a  separate  performance  standard  and,  if  so, 
how  to  manage  for  success.  Section  XI  presents  the  simulafion  results,  comparing  economic 
outcomes  for  Medicare,  for  successful  groups  within  GVPS,  and  for  physicians  who  are  not 
operating  under  separate  performance  standards.  Results  from  this  first  generation  simulation 
model  are  intended  to  help  facilitate  discussion  about  fiarther  research  and  the  implications  of 
particular  policy  choices.  Section  XII  contains  conclusions  and  recommendations  for  GVPS 
models. 

The  report  also  contains  several  appendices.  Appendix  A  provides  further  information 
about  the  physician  groups  comprising  our  advisory  committee.  Appendix  B  describes  the 
construction  and  handling  of  data  files  used  for  the  empirical  research  tasks.  Appendix  C 
describes  potential  refinements  of  the  utilization  measures  and  performance  standards  presented 
in  this  report. 

III.      Policy  Context  and  Alternatives 

This  project  describes  the  policy  of  GVPS,  perhaps  one  of  several  policies  HCFA  may 
consider  in  addressing  the  following  general  problems  faced  by  the  Medicare  program: 


5 


►  Increasing  costs.  A  fundamental  problem  is  the  rising  cost  of  financing  Medicare- 
covered  services. 

►  Incentives  to  provide  more  services.  Expenditixre  increases  are  driven  in  part  by 
prevailing  fee-for-service  incentives  for  providers  to  deliver  more  services  than  may  be 
necessary. 

"  ►        Potential  threats  to  access  and  quality.  Policies  designed  to  control  costs  can  lead  to 
concerns  about  reductions  in  quality  of  care,  access  to  needed  services,  and  the  liberty  to 
choose  among  providers. 

This  section  briefly  reviews  three  other  policy  alternatives  against  which  HCFA  may 
weigh  the  relative  merits  of  GVPS:  state  level  MVPS,  HMO  risk  contracting,  and  focusing  on  the 
volume  and  intensity  of  services  delivered  by  hospital  medical  staffs. 

A.       State  Level  MVPS 

An  alternative  to  the  national  MVPS  would  be  to  mandate  geographic  groupings  of 
physicians,  such  as  a  region  or  state  (Holahan  and  Zuckerman,  1993;  PPRC,  1990,  1992).  There 
are  at  least  two  potential  benefits  of  moving  in  this  direction.  First,  there  are  observable 
differences  between  market  areas  in  expenditure  growth  rates.  Measuring  the  volume 
performance  of  different  states  separately  could  give  greater  relevance  to  the  target  for  providers 
than  average  national  rates.  Second,  states  may  develop  infrastructures  as  part  of  health  reform 
efforts  that  create  the  ability  to  monitor  and/or  enforce  changes  in  practice  patterns  at  more  local 
levels. 

There  are  caveats  and  limitations  associated  with  this  policy  proposal.  Absent  the 
developmeni  of  infrastructures  under  more  elaborate  health  care  reforms,  states  or  regions  are  not 
likely  to  have  mechanisms  to  monitor  or  cause  changes  in  physicians'  practice  patterns.'  Also 
relevant  to  this  approach  is  the  issue  of  patients  crossing  state  borders  to  receive  services. 
Finally,  applying  reduced  fee  updates  for  failure  to  meet  performance  standards  could  create 
price  differentials  across  state  borders:  physicians  in  successful  states  would  trend  toward  higher 
Medicare  payment  rates  and  beneficiary  copayment  rates  than  physicians  in  unsuccessful  states. 


'  Physicians  also  may  be  differentiated  by  specialty.  Specialty  societies  currently  exert  some 
"soft"  influence  on  their  members,  especially  regarding  issues  of  clinical  appropriateness. 
Extending  this  influence  to  counteract  economic  incentives  may  or  may  not  be  feasible. 


6 


B.       HMO  Risk  Contracting 

For  over  a  decade,  HMOs  have  had  the  opportunity  to  contract  with  HCFA  to  provide  all 
Medicare-covered  services  for  beneficiaries  who  choose  to  enroll.  Generally,  capitation 
promises  several  advantages  over  fee-for-service.  For  the  provider,  the  combination  of 
enrollment  and  fixed  capitation  payments  permits  control  over  the  development  and  operation  of 
an  integrated  service  delivery  system.  The  payer  knows  its  costs  in  advance,  essentially 
delegates  the  responsibility  for  managing  care  to  the  contracting  health  plan,  and  generally 
oversees  the  process.  Also  appealing  about  capitation  is  the  overlapping  interest  in  reducing 
utilization:  The  health  plan  can  earn  financial  profits  by  lower  utilization  rates,  while  the  payer 
may  reduce  its  projected  expenditure  growth  rates. 

Recently,  many  HMOs  have  shown  interest  in  Medicare  risk  contracting,  and  the  trend  is 
toward  higher  aggregate  enrollment.  This  is  consistent  with  a  deepening  penetration  of  managed 
care  organizations  in  many  health  care  markets.  Many  providers  and  insurance  companies  pre 
entering  multiple  contracts  to  help  assure  continued  or  expanded  market  shares.  As  in  the  early 
1980's,  there  is  a  widespread  sentiment  that  capitation  is  the  "wave  of  the  future"  for  most 
payers,  including  Medicare. 

There  are  difficulties  surrounding  HMO  risk  contracting.  First,  enrollment  patterns  with 
favorable  selection  virtually  preclude  savings  for  Medicare.  This  is  because  the  payment  system 
has  weak  adjustments  for  differences  in  health  status  between  HMO  enroUees  and  beneficiaries 
in  the  fee-for-service  sector.  Although  HMOs  also  can  experience  unfavorable  selection,  the 
voluntary  nature  of  the  system  allows  those  plans  to  exit  the  Medicare  market,  leaving  only 
HMOs  that  make  money  (Porell  and  Tompkins,  1993).  Second,  under  capitation  the  health  plan 
reaps  profits  from  lower  utilization  while  Medicare  keeps  relatively  little  of  any  savings 
generated  through  efficiency.  Managed  care  can  lead  to  lower  costs  (e.g.,  fewer  hospital  days  of 
care);  however,  research  findings  do  not  indicate  strongly  that  capitation  is  necessary  to  achieve 
lower  costs  (Miller  and  Luft,  1994). 

C       Penalize  High  Cost  Hospital  Medical  Staffs 

This  proposed  approach  would  withhold  a  portion  of  payments  to  physicians  who 
practice  in  hospitals  deemed  to  deliver  the  highest  average  volume  and  intensity  of  service  per 
admission  (Welch  and  Miller,  1994).  HCFA  would  return  the  amount  withheld  if  the  physicians 
could  reduce  their  average  relative  value  units  per  admission.  This  approach  is  attractive  in  part 
because  it  gives  responsibility  to  physicians  who  have  the  authority  to  manage  the  relevant 
utilization  patterns.  Financial  penalties  would  be  focused  more  on  providers  identified  to  have 
high  costs,  rather  than  applying  penalties  uniformly  to  all  physicians. 

A  difficulty  with  this  policy  is  that  it  focuses  on  specific  episodes  and  not  necessarily  on 
managing  all  patient  care.  In  addition,  it  might  offer  perverse  incentives  to  shift  the  provision  of 
care  away  from  the  inpatient  setting,  even  if  unwarranted.  Another  possible  drawback  is  the 


7 


regulatory  and  adversarial  approach  to  physicians.  While  engendering  goodwill  in  the  physician 
community  need  not  be  HCFA's  primary  objective,  many  other  payers  are  concluding  that 
working  with  physicians  is  their  preferred  strategy  for  meeting  long  rvin  goals  of  efficient  service 
delivery. 

IV.      Rationale  and  Goals  for  GVPS 
A.  Rationale 

The  Federal  government  has  implemented  MVPS  to  control  growth  in  expenditures  for 
professional  and  supplier  services.  Payments  exceeding  target  levels  can  be  recouped  by 
reducing  updates  to  fees  (i.e.,  the  conversion  factors)  under  the  Medicare  Fee  Schedule.'  This 
provides  HCFA  with  a  useful  tool  for  enforcing  predetermined  budgets.  However,  pooling  all 
physicians'  reimbursements  at  the  iiational  level  gives  weak  "collective"  incentives  for 
physicians  to  control  utilization  levels.  Attempts  by  individual  physicians  to  become  more 
efficient  are  unrewarded.  Even  worse,  efficient  providers  who  do  not  provide  unnecessary 
services  are  penalized  immediately  through  lower  revenues. 

The  Medicare  physician  payment  system  involves  a  dual  approach  to  cost  control:  strong 
regulation  of  prices,  and  weak  incentives  to  control  volume  and  intensity.  There  were  concerns 
that  strong  price  regulations  could  lead  physicians  to  increase  volume  and  intensity  in  order  to 
offset  reductions  in  their  personal  incomes.  Physicians  are  aware  of  these  incentives  to  inflate 
volume  ("churning  patients")  in  order  to  realize  target  income  levels.  In  the  future,  policymakers 
may  want  to  replace  this  simple  "treadmill"  with  policies  that  evoke  appropriate  responses  from 
physician  organizations.  Specifically,  we  are  aiming  to  encourage  strategic  orientations  that 
focus  on  managing  all  services  received  by  patients. 

Medicare  is  one  among  many  payers  in  the  U.S.  health  care  system.  Ove;  time.  Medicare 
physician  fee  levels  could  become  low  enough  to  hinder  beneficiaries'  access  to  services.  Some 
analysts  are  concerned  that  Medicare  may  be  approaching  that  point  already  (PPRC,  1994).  To 
steer  away  from  this  possibility.  Medicare  needs  coherent  payment  policies  that  allow  physicians 
to  manage  total  expenditures  through  cost-effective  delivery  systems,  and  do  not  rely  on  just  low 
prices  per  unit  of  service. 

Congress  acknowledged  that  refinements  to  the  basic  national  approach  to  expenditure 
control  could  be  warranted,  and  specifically  called  for  development  of  group-specific 
performance  standards.  The  legislation  that  initiated  MVPS  included  the  following  provision: 


'  We  use  the  terms  volume  performance  standards  and  targets  interchangeably. 


8 


...  the  Secretary  shall .  .  .  implement  a  plan  under  which  qualified 
physician  groups  could  elect  annually  separate  performance 
standard  rates  of  increase  other  than  the  [national]  performance 
standard  rate  of  increase  established  for      year  . .  .  The  Secretary  ^ 
shall  develop  criteria  to  determine  which  physician  groups  are 
eligible  to  elect  to  have  applied  to  such  groups  separate 
performance  standard  rates  of  increase  and  the  methods  by  which 
such  group-specific  performance  standard  rates  of  increase  would 
be  accomphshed.  (OBRA  1989,  Section  1848f  4) 

This  project  is  intended  to  help  HCFA  explore  this  possibility. 

B.       Goals  for  HCFA  and  Providers 

HCFA  conducts  business  with  providers  whenever  beneficiaries  receive  Medicare- 
covered  services.  HCFA  views  transactions  as  expenditures,  while  providers  view  them  as 
revenues.  In  the  aggregate,  successful  control  of  Medicare  expenditures  translates  into  reduced 
revenues  for  providers.  This  creates  an  inherent  divergence  of  interest  between  HCFA  and 
providers  generally.  Still,  the  potential  overlap  of  interest  is  very  large  as  well,  such  as  the 
well-being  of  beneficiaries  and  the  quality  of  care.  The  size  of  this  overlap  relative  to  the 
divergence  of  interest  is  greatest  between  HCFA  and  providers  that  provide  the  highest  quality  of 
services,  while  being  relatively  efficient. 

We  assume  HCFA  would  espouse  the  following  four  potential  goals  for  a  comprehensive 
physician  payment  policy: 

►  Achieve  and  maintain  high  quality  health  care.  Medicare  beneficiaries  should  receive 
services  that  equal  or  exceed  prevailing  quality  standards  in  the  local  community. 

►  Improve  clinical  efficiency.  For  each  beneficiary,  the  combinafion  of  services  results  in 
the  lowest  cost  necessary  to  meet  the  quality  standards.  This  means  avoidance  of 
unnecessary  referrals,  tests,  and  services. 

►  Improve  market  efficiency.  This  is  multifaceted: 

•  Relatively  efficient  providers  are  rewarded  and  increase  their  market  share, 

•  Inefficient  providers  bear  the  brunt  of  fee  reductions  or  other  penalties, 

•  Providers  generally  become  more  efficient  in  response  to  the  market  dynamics,  or 
lose  market  share. 


9 


►  Achieve  budget  neutrality.  Implementing  GVPS  does  not  lead  to  higher  aggregate 
Medicare  expenditure  levels. 

Providers  electing  to  participate  under  GVPS  may  not  all  have  the  same  objectives  or 
priorities.  However,  participation  might  help  them  achieve  particular  goals: 

►  Compensation  for  clinical  efficiency.  Savings  attributable  to  clinical  efficiency  could 
be  shared  with  participating  providers. 

►  Greater  market  share.  This  may  be  achieved  by  increasing  the  number  of  patients 
served  and/or  the  scope  of  services  provided. 

►  Support  for  new  strategic  orientations.  Market  pressures  for  efficiency  create  new 
challenges  and  new  opportunities  for  providers.  The  data  and  potential  for  rewards 
associated  with  GVPS  could  promote  strategic  orientations  that  include,  but  go  beyond 
Medicare. 

GVPS  models  may  not  be  better  in  every  respect  than  the  alternatives  described  in 
Section  III.  However,  they  do  resemble  the  alternatives  in  certain  important  ways: 

►  Managed  care.  GVPS  models  could  put  physician  organizations  "in  the  driver's  seaf ' 
with  respect  to  managing  a  broad  range  of  services  delivered  to  their  patients.  As  with 
HMOs,  this  policy  moves  in  the  direction  of  integrated  delivery  systems  that  manage  total 
patient  care. 

»■        Involvement  of  high  cost  beneficiaries.  Aggregate  Medicare  expenditure  levels  are 
driven  by  services  delivered  to  a  small  minority  of  beneficiaries.  Like  the  high  cost 
medical  staff  policy  proposals,  GVPS  could  engage  the  providers  who  currently  serve 
high  cost  beneficiaries.  This  is  a  distinct  advantage  over  capitation,  which  encourages 
participation  by  health  plans  that  do  not  enroll  high  cost  patients. 

►  Focused  individual  and  collective  incentives.  GVPS  could  change  incentives  for 
providers  who  elect  separate  performance  standards.  GVPS  also  could  concentrate 
penalties  and  collective  incentives  on  the  remaining  physician  subpopulation — similar  to 
the  goal  of  state  level  MVPS  options. 

V.       Summary  of  Basic  GVPS  Models 
A.       The  Policy  Context:  MVPS 

We  propose  policy  options  based  on  Group-Specific  Volume  Performance  Standards 
(GVPS).  This  approach  would  supplement  and  refine  the  national  MVPS,  which  focuses  on 


10 


rates  of  increase  rather  than  absolute  expenditure  levels.  This  is  consistent  with  policy  goals  of 
achieving  sustainable  grov^h  rates  in  Medicare  spending.  Proposed  GVPS  models  emulate  the 
focus  on  growth  rates,  which  could  encourage  participation  by  providers  with  relatively  sick 
patients  and/or  elaborate  practice  styles.  Over  time,  HCFA  could  transition  to  models  that 
evaluate  providers  on  their  expenditure  levels  relative  to  other  providers,  as  well  as  grov/th  rates. 

GVPS  models  must  depart  from  some  aspects  of  the  current  MVPS  approach.  First, 
national  expenditures  are  measured  in  total,  with  adjustments  for  changes  in  the  Medicare 
population  size.  At  the  provider  level,  it  is  more  valid  and  convenient  to  measure  performance 
on  average  for  patients  seen.  Second,  current  performance  standards  are  set  nationally  and 
reflect  average  performance  not  only  across  providers  but  also  across  market  areas.  Valid 
performance  standards  for  providers  need  to  reflect  local  market  conditions,  not  expectations 
averaged  across  all  market  areas  in  the  country.  Third,  the  case  mix  of  patients  seen  by  a 
provider  can  change  over  time  and  performance  standards  should  account  for  such  changes. 
HCFA  has  experience  with  these  issues  through  its  capitation  payment  system,  and  we  borrow 
from  some  methods  already  used  by  HCFA.  Finally,  GVPS  could  encourage  physicians  to 
manage  all  Medicare  services  for  their  patients.  Thus,  the  policy  could  embody  a  vision  for 
physicians  to  manage  their  patients,  not  just  their  own  practices  or  only  professional  and  supplier 
services. 

B.       Methods  to  Monitor  Volume  Performance 

We  measure  average  resource  consumption  at  the  provider  level  by  Reimbursements  Per 
Unique  Patient  Seen  (RPUPS).  In  the  denominator  of  this  ratio  are  the  Medicare  beneficiaries 
who  receive  physician  services  from  the  group  during  the  calendar  year.  In  the  numerator  are 
Medicare  reimbursements  to  all  providers  seen  by  these  beneficiaries  during  the  calendar  year, 
for  the  services  included  in  the  measure.  Two  alternative  scopes  of  service  are  contemplated  for 
the  GVPS  option: 

•         Those  services  currently  under  MVPS. 
• .       All  Medicare-covered  services. 

In  either  case,  providers  are  reimbursed  for  services  according  to  all  of  the  applicable  prevailing 
payment  policies,  including  the  Medicare  Fee  Schedule  for  physician  services,  the  hospital 
Prospective  Payment  System,  etc. 

RPUPS  G  Y  =  (Reimbursements  to  All  Providers  for  Patients  of  G)  y  ^  (N)  g,  y 

where  G  is  a  particular  group  operating  under  its  ovra  GVPS,  and 

Y  is  a  calendar  year,  either  a  base  year  or  a  performance  year. 


11 


Under  GVPS,  HCFA  would  compare  resource  consumption  in  a  given  year  to  a  target 
level  or  performance  standard  that  is  derived  from  resource  consumption  levels  for  a  base  year, 
times  a  specified  percentage  rate  of  increase. 

Target  =  Expected  RPUPS  performance  Year 

=  RPUPS  Base  Year  ^  Rstc  of  Incrcasc 

where  the  Rate  of  Increase  is  specified  by  the  Federal  government. 

Targets  could  be  set  on  a  year-to-year  basis,  using  the  most  recent  observed  RPUPS  as  a  base. 
Preferably,  targets  could  be  updated  cumulatively  from  the  level  of  RPUPS  observed  in  a 
specified  base  year,  without  regard  to  intermediate  values  of  RPUPS. 

If  the  observed  RPUPS  Penonnunce  Year  is  less  than  the  target,  the  rate  of  growth  in  average 
resource  consumption  is  lower  than  the  rate  specified  by  the  Federal  government.  We  explore 
methods  to  adjust  for  differences  in  a  provider's  case  mix  between  the  base  year  and  performance 
year.  Differences  between  expected  and  actual  reimbursement  rates  for  a  provider's  patients  are 
deemed  to  be  savings  attributable  to  changes  in  relative  efficiency.  Multiplying  the  savings 
amount  per  patient  by  the  number  of  Medicare  patients  seen  by  the  provider  produces  an  estimate 
ot  total  Medicare  savings  due  to  changes  in  the  provider's  relative  efficiency. 

Medicare  Savings  y  =  (Target'  y  -  RPUPS  y  )  x  N  y 

where  Y  is  a  given  year  in  which  a  group's  performance  is  being  evaluated, 

Target'  is  the  predicted  RPUPS  y,  adjusted  for  differences  in  the  provider's  case 
mix  between  the  base  year  and  the  performance  year,  and 

N  is  the  number  of  Medicare  beneficiaries  who  received  physician  services  firom 
the  group  (i.e.,  the  denominator  in  RPUPS  y)- 

If  RPUPS  refers  to  professional  and  supplier  services  only  (i.e.,  MVPS  services),  the  estimated 
Medicare  Savings  will  refer  only  to  those  services.  RPUPS  also  could  encompass  all  Medicare- 
covered  services,  and  savings  would  be  estimated  accordingly. 

In  addition  to  measuring  Medicare  savings  each  year,  HCFA  may  choose  to  evaluate 
Cumulative  Medicare  Savings  attributable  to  a  group's  performance.  In  that  context,  each  year 
the  group  will  make  a  positive  or  negative  increment  to  its  cumulative  savings.  Whether  a  group 
has  accumulated  a  surplus  or  a  deficit  may  affect  the  economic  consequences  of  Medicare 
Savings  in  any  given  year,  in  terms  of  rewards  or  penalties. 


12 


C.       Rewards  and  Penalties 

If  the  value  of  Medicare  Savings  in  a  given  year  is  positive,  the  group  has  demonstrated 
improvement  in  relative  efficiency.  If  the  value  is  negative,  the  group  has  not  improved  its 
relative  efficiency  that  year.  A  value  of  zero  means  tne  group  exactly  has  met  its  target;  in  other 
words,  the  group  has  met  HCFA's  specified  growth  rate  for  the  average  provider.  These 
outcomes  can  be  addressed  in  the  payment  system  through  policies  that  define  rewards  and 
penalties.  Here  we  briefly  present  the  concepts  and  potential  mechanisms  for  dealing  with 
rewards  and  penalties. 

Under  MVPS,  failure  to  meet  national  performance  standards  leads  to  blanket  penalties 
for  all  physicians.  The  mechanism  is  to  reduce  fliture  increases  to  physicians'  fees.  In  the 
proposed  GVPS  models,  HCFA  would  retain  its  policy  of  setting  uniform  conversion  factors  for 
all  physicians.  The  GVPS  payment  system  would  distinguish  between  physician  groups  in  terms 
of  relative  efficiency  by  giving  lump  sum  reward  payments  to  successful  groups.  The  most 
conservative  type  of  reward  would  be  based  on  the  actuarial  value  of  any  national  fee  penalties: 
HCFA  could  "refund"  the  value  of  lost  revenues.  We  also  consider  models  that  would  go 
beyond  recompensing  groups  for  fee  penalties.  GVPS  models  could  give  rewards  based  on 
savings  to  Medicare,  and/or  specific  penahies  for  failure  to  meet  performance  standards.  Penalty 
amounts  could  be  withheld  from  future  fee-for-service  payments  to  the  group. 

The  value  of  additional  rewards  (and  penalties)  could  be  a  function  of  several  potential 
factors,  beginning  with  the  estimated  Medicare  Savings.  It  would  be  desirable  and  appropriate 
for  Medicare  to  retain  a  portion  of  the  savings.  For  reasons  of  equity  and  appropriate  incentives, 
the  physician  group  also  could  receive  a  portion  of  the  savings,  i.e.,  a  reward.  Because  incentives 
and  savings  apply  to  reimbursements  to  all  providers,  one  gauge  for  reward  payments  to  the 
group  is  its  proportion  of  Medicare  reimbursements  for  its  patient  population.  We  call  this  the 
Patient  Capture  Ratio  (PCR).  HCFA  may  choose  other  criteria  for  sharing  savings,  instead  of  or 
in  addition  to  the  capture  ratio  such  as  a  simple  rule  or  Sharing  Rate.  For  example,  HCFA  may 
choose  simply  to  share  savings  equally  with  the  group  on  the  premise  that  all  appropriate 
Medicare  savings  are  equally  valuable  to  HCFA,  whether  they  resuU  in  lower  fee-for-service 
payments  to  the  group  or  to  other  providers.^  Using  these  criteria,  general  models  for  rewards 
and  penalties  are: 

Reward  Group  =  Refund  +  (Medicare  Savings  x  Patient  Capture  Ratio  Group  ^  Sharing  Rate) 
Penalty  Group  =  (Medicare  Losses  x  Patient  Capture  Ratio  Group  ^  Sharing  Rate) 


^  The  values  of  the  Sharing  Rate  may  differ  for  rewards  and  penalties.  Also,  HCFA  could 
specify  limits  on  the  values  of  any  reward  or  penalty. 


13 


where  rewards  (penalties)  may  occur  only  if  a  group  has  positive  (negative)  Cumulative 
Medicare  Savings. 

Paying  rewards  for  the  success  of  groups  raises  questions  about  financing  and  budget 
neutrality.  For  savings  and  rewards  related  to  MVPS  services,  HCFA  still  could  use  the  national 
MVPS  to  calculate  universal  penalties.  In  those  calculations,  the  Medicare  Savings  amount  (for 
MVPS  services)  attributed  to  groups  operating  under  GVPS  could  be  added  to  the  national 
aggregate  expenditure  totals.  This  would  ignore  the  savings  generated  by  the  GVPS  providers 
and  base  penalties  on  the  performance  of  providers  outside  of  GVPS.  Providers  under  GVPS 
would  receive  the  same  conversion  factors,  reflecting  the  penalties,  but  the  difference  would  be 
offset  by  the  lump  sum  payments.^ 

For  other  types  of  services  (i.e.,  not  covered  under  MVPS),  the  Federal  government  also 
has  processes  for  determining  increases  in  payment  rates.  The  context  for  making  those 
determinations  presumably  includes  budget  considerations,  although  there  is  no  structure  that  is 
parallel  to  MVPS.  HCFA  may  implicitly  disregard  estimated  savings  under  GVPS  when  it 
makes  these  determinations,  effectively  creating  a  parallel  situation  in  which  the  burden  of 
financial  penalties  is  concentrated  on  providers  outside  the  umbrella  of  managed  care  under 
GVPS. 

Table  1  presents  three  model  variations  for  GVPS.  These  three  models  are  presented 
from  among  the  many  potential  variations  to  illustrate  important  policy  parameters  regarding  the 
scope  of  services  and  the  incentive  structure.  Model  1  uses  only  professional  and  supplier 
services  in  the  definitions  of  RPUPS  and  Medicare  Savings,  while  Models  2  and  3  refer  to  all 
Medicare-covered  services.  Models  1  and  2  carry  reward  potential  only,  with  no  specific 
penalties  for  failing  to  meet  performance  standards,  whereas  Model  3  carries  potential  rewards 
and  penalties. 

The  formulas  given  in  Table  1  for  reward  and  penalty  amounts  also  are  illustrative.  In 
each  of  the  models,  the  formulas  refer  to  the  entire  scope  of  services  used  to  define  RPUPS.  A 
model  that  includes  provisions  for  specific  penalties  might  share  greater  proportions  of  savings 
with  the  group.  However,  the  formula  for  rewards  and  penalties  need  not  be  entirely  symmetric. 
Furthermore,  HCFA  may  decide  to  avoid  or  strictly  limit  the  potenfial  amounts  of  any  penalfies, 
given  the  absence  of  patient  "lock-in"  provisions  to  control  utilization.  Model  1  would  give 
rewards  to  groups  equal  to  any  reftinds  plus  (Medicare  Savings  x  Patient  Capture  Ratio  x  0.75). 


^  In  an  alternative  discussed  later,  HCFA  would  add  back  only  the  specific  reward  payments 
to  groups  in  the  calculations  for  MVPS.  This  would  partially  credit  the  nafional  performance 
with  the  success  of  the  groups. 


14 


Table  1:  Summary  of  Three  Model  Variations 

Model  1 

Model  2 

Model  3 

Services  in  Volume 
Measure: 

MVPS 

All  Medicare 

All  Medicare 

Formula  for  Sharing  Savings: 

MVPS: 

(MS  X  PGR  X  0.75) 

(MS  X  PGR  X  0.75) 

(MS  X  PGR  X  0.95) 

Other: 

None 

(MS  X  PGR  X  0.75) 

(MS  X  PGR  X  0.95) 

Formula  for  Penalties: 

MVPS: 

None 

None 

(MS  X  PGR  X  0.10) 

Other: 

None 

None 

(MS  X  PGR  X  0.10) 

MVPS  services  include  most  Part  B  professional  and  supplier  services,  and  exclude  ASC  and 
outpatient  department  facility  costs,  ambulance  services  and  durable  medical  equipment. 


MS  refers  to  the  estimated  Medicare  Savings  for  the  group.  PGR  is  the  Patient  Gapture  Ratio, 
which  is  the  proportion  of  all  patients'  Medicare  reimbursements  that  were  to  the  group. 

As  discussed  above,  multiplying  by  the  PGR  provides  a  useful  estimate  of  the  reimbursements 
that  might  have  been  paid  to  the  group,  had  they  not  improved  overall  efficiency.  The  Sharing 
Rate  of  0.75  represents  a  compromise  between  zero,  which  reflects  traditional  fee-for-service, 
and  unity,  which  conveys  a  "virtual  capitation"  scenario. 

Model  2  would  base  reward  payments  on  all  Medicare-covered  services,  with  amounts 
equal  to  any  refunds  plus  (Medicare  Savings  x  Patient  Gapture  Ratio  x  0.75).  Model  3  carries 
higher  potential  rewards,  equal  to  any  refunds  plus  (Medicare  Savings  x  Patient  Gapture  Ratio  x 
0.95),  and  would  account  for  negative  Medicare  Savings  estimates  through  a  penalty  equal  to 
(Medicare  "Losses"  x  Patient  Gapture  Ratio  x  0.10).  This  moves  toward  virtual  capitation. 


15 


VI.     Utilization  Measures 

A.  The  Basic  Measure:  RPUPS 

HCFA  monitors  total  reimbursements  for  physician  and  supplier  services  under  MVPS, 
making  expHcit  allowance  in  the  performance  standards  for  growth  in  the  Medicare  population. 
Under  GVPS  models,  however,  we  work  with  average  reimbursements  because  the  number  of 
patients  seen  by  a  group  can  change  unpredictably  over  time.  Similarly,  insurers  often  express 
their  costs  as  rates  per  person,  "per  member-month,"  etc.  These  are  convenient  measures  for 
comparing  differences  between  subpopulations,  and  for  assessing  trends  over  time  even  when  the 
population  size  changes.  In  the  GVPS  context,  the  "population"  is  the  set  of  Medicare 
beneficiaries  seen  by  a  physician  organization  during  a  calendar  year.  Costs  are  measured  from 
HCFA's  perspective,  i.e.,  as  Medicare  reimbursement  amounts  for  patients  seen  by  the  group. 

One  goal  for  GVPS  is  to  help  control  aggregate  reimbursements,  or  equivalently, 
reimbursements  per  beneficiary.  A  physician  group  that  manages  utilization  within  its  own 
system  is  likely  to  contribute  to  lower  Medicare  costs  overall.  However,  an  objective  here  is  to 
develop  an  appropriate  measure  that  takes  account  of  any  excessive  or  potentially  offsetting 
services  from  other  providers.  Therefore,  the  measure  of  provider  performance  includes  all 
relevant  services  for  patients  seen,  including  those  delivered  by  other  providers.  We  would  like 
physician  groups  to  embrace  the  perspective  of  the  entire  patient,  for  clinical  and  economic 
reasons. 

The  ratio  constructed  from  the  unique  Medicare  patients  seen  by  a  provider  and  those 
patients'  Medicare  reimbursements,  we  call  Reimbursements  Per  Unique  Patient  Seen  (RPUPS). 
This  measure  includes  only  services  delivered  to  a  provider's  patients — not  all  beneficiaries  in 
the  same  city,  county,  state,  etc.  Accordingly,  the  measure  of  an  individual  provider's 
performance  would  exclude  beneficiaries  who  either  saw  no  physician  during  the  period,  or  saw 
only  physicians  outside  that  physician  organization. 

There  are  several  potential  variations  on  the  basic  definition  of  RPUPS.  Whatever  the 
specific  definition,  RPUPS  would  be  defined  and  measured  the  same  way  each  year.  RPUPS  for 
one  year  would  constitute  the  baseline  to  which  a  target  rate  of  increase  is  applied.  Comparing 
changes  in  the  value  of  RPUPS  between  years  to  target  rates  of  change  will  allow  HCFA  to 
determine  whether  a  physician  organization  is  helping  to  achieve  national  aggregate  target  rates 
of  increase. 

B.  Scope  of  Services 

MVPS  includes  most  Medicare  Part  B  physician,  professional  and  supplier  services. 
Among  services  not  included  are  facility  usage  (including  ambulatory  surgical  centers  and 
hospital  outpatient  departments),  ambulance  services,  and  durable  medical  equipment.  The  same 
set  of  services  could  be  applied  to  the  utilization  measure  for  physician  groups  under  GVPS. 


16 


Alternatively,  the  scope  of  services  could  be  expanded  to  include  institutions  and  all  other 
services.  We  consider  models  that  differ  in  terms  of  the  scope  of  services  included  in  the 
measure  of  physicians'  performance: 

•  Services  currently  included  under  MVPS,  or 

•  All  Medicare-covered  services. 

Expanding  the  roster  of  services  could  help  GVPS  to  extend  incentives  for  efficiency  to 
the  rest  of  Medicare-covered  services.  Inclusion  of  other  services  could  give  more  opportunities 
for  physicians  to  reduce  overall  expenditures.  It  is  believed  that  HMOs  have  achieved  savings 
relative  to  fee-for-service  through  reduced  hospital  utilization.  This  may  continue  to  be  true, 
although  as  hospital  days  of  care  decline  in  most  regions,  management  of  home  health  care, 
post-acute,  and  professional  services  becomes  more  important  in  competitive  markets.  In 
general,  the  successes  of  managed  care  generally  are  likely  to  stem  from  cost-effective 
innovations  and  substitutions  involving  a  wide  range  of  services. 

During  this  study  we  worked  with  physician  groups  located  in  different  parts  of  the 
country.  Our  study  files  contain  data  from  the  geographic  areas  where  most  of  these  physician 
groups  are  located.  We  defined  the  geographic  areas  as  the  three-digit  ZIP  Code  areas  that 
account  for  at  least  five  percent  of  Medicare  patients  seen  by  the  original  set  of  groups.  From 
each  of  the  study  areas,  we  selected  a  sample  of  providers  that  appeared  to  be  the  most  likely 
candidates  for  GVPS.  Selection  was  based  on  the  provider  having  a  large  number  of  physicians, 
a  large  number  of  beneficiaries  seen,  and  high  Medicare  reimbursement  levels  in  1992. 

Also,  from  each  area  we  drew  random  samples  of  beneficiaries  who  received  services 
from  any  physician  provider  in  the  selected  geographic  areas,  in  order  to  determine  market 
trends.  We  obtained  all  Medicare  claims  records  from  1991  through  1993  for  every  beneficiary 
who  saw  any  of  the  sample  providers  anytime  during  that  period.  The  average  number  of 
Medicare  beneficiaries  seen  at  least  once  in  1992  by  the  78  providers  was  about  1 5,000.  For  the 
beneficiaries  sampled  randomly  we  also  obtained  all  Medicare  claims  records  from  the  years 
1991  through  1993.  See  Appendix  B  for  a  fuller  description  of  the  data  steps. 

C.       Illustrative  Findings 

Figures  1  and  2  show  the  values  of  RPUPS  in  1992  for  78  selected  providers  located  in 
ten  of  the  geographic  areas  included  in  this  study.  The  values  of  RPUPS  differ  substantially 
between  providers,  reflecting  differences  in  case  mix,  relative  efficiency,  input  prices,  and 
Medicare  carrier  or  fiscal  intermediary  practices. 

Figure  1  shows  values  of  RPUPS  based  on  reimbursements  for  physician  and  supplier 
services.  For  all  78  providers,  RPUPS  averaged  $1,969  and  ranged  from  $706  to  $5,200.  If  the 
providers  with  the  single  highest  and  single  lowest  extreme  values  are  ignored,  RPUPS  averages 


Figure  1:  RPUPS  Values  for  78  Providers  Selected  from  10  Markets,  Physician  and  Supplier 

Services 


6000 


5000 


4000 


J  3000 

o 

Q 


2p00 


1000 


I 


0  l"i'MMM'i 


ilJ|U|lljlli»|LI|l.lil.l  l.l|U|l.l|l.l|»|ll  ll,l.l|l.l|l.l|N|l.l|ll|l.l,IJ,U, 


i"i-r'i 


i"r'i"i"i 


1    3   5    7   9  11  13  15  17  19  21  23  25  27  29  31  33  35  37  39  41  43  45  47  49  51  53  55  57  59  61  63  65  67  69  71  73  75  77 


Source:  National  Claims  History  file,  1992. 

Note:  Reimbursements  Per  Unique  Patient  Seen  (RPUPS)  are  the  mean  Medicare  reimbursements  for  Medicare  patients  seen 
by  the  provider,  unadjusted  for  case  mix  or  geographic  differences  in  prices. 


Provider 


Figure  2:  RPUPS  for  78  Providers  Selected  from  10  Markets,  All  Medicare  Services 


00 


25000 


20000 


15000 


a 

"3 
O 


10000 


5000 


0  |UiU|li|li|ll|llilJjUi 


1    3   5   7   9  11  13  15  17  19  21  23  25  27  29  31  33  35  37  39  41  43  45  47  49  51  53  ^5  57  59  61  63  65  67  69  71  73  75  77 

Provider 

Source:  National  Claims  History  file,  1992. 

Note:  Reimbursements  per  Unique  Patient  Seen  (RPUPS)  are  the  mean  Medicare  reimbursements  for  Medicare  patients  seen  by  the  provider, 
unadjusted  for  case  mix  or  geographic  differences  in  prices. 


19 


$1,944  and  ranges  from  $759  to  $3,907.  Figure  2  shows  results  for  all  Medicare-covered 
services.  For  all  78  providers,  RPUPS  averaged  $8,297  and  ranged  from  $3,072  to  $24,451.  If 
the  providers  with  the  single  highest  and  single  lowest  extreme  values  are  ignored,  RPUPS 
averages  $8,153  and  ranges  from  $3,324  to  $16,647. 

Figure  3  shows  the  proportion  of  total  reimbursements  that  was  for  physician  and  supplier 
services  for  each  provider's  patients.  Physician  and  supplier  services  averaged  25  percent  of  the 
total  and  ranged  from  15  to  39  percent.  Figure  4  shows  that  there  was  also  a  wide  variation  in 
the  proportion  of  reimbursements  for  physician  and  supplier  services  that  were  paid  to  that 
provider,  averaging  1 8  percent  and  ranging  from  2.9  percent  to  52.9  percent.  This  represents  the 
Patient  Capture  Ratio  for  those  services. 

Physician  groups  were  defined  using  the  Provider  Tax  Number,  also  known  by  the  IRS  as 
the  Employer  Identification  Number  (EIN),  which  is  available  only  for  physician  and  supplier 
service  claims.  However,  physician  group  practices  can  be  part  of  integrated  health  systems  that 
include  facilities  and  other  types  of  providers.  Data  limitations  (i.e.,  the  absence  of  EINs)  make 
it  difficult  to  measure  capture  ratios  for  these  other  types  of  services.  Calculating  the  PCR  for  all 
Medicare  services  would  require  the  Provider  Identification  Numbers  of  facilities  and  other 
provider  entities  affiliated  with  the  physician  group.  Later  we  discuss  some  possible 
implications  of  these  alternatives  (see  Section  VIII,  E). 

For  GVPS,  relevant  comparisons  relate  to  changes  in  RPUPS  over  time  in  relation  to 
changes  in  market- wide  measures  of  RPUPS.  We  discuss  those  comparisons  next,  along  with 
setting  targets  and  estimating  savings  due  to  relative  efficiency.  Note  that  Appendix  C  presents 
potential  variations  in  the  definition  of  RPUPS,  including  removing  some  beneficiaries  from 
RPUPS,  removing  some  categories  of  reimbursement  from  RPUPS,  and  adjusting  RPUPS  for 
changes  in  case  mix. 

VII.    Setting  Performance  Standards  or  Targets 

A".       Scope  of  Services 

HCFA  can  calculate  the  value  of  RPUPS  each  year  for  every  group  operating  under 
GVPS.  In  order  to  estimate  the  change  in  relative  efficiency  of  the  provider,  as  well  as  the 
resulting  savings  to  Medicare,  we  need  to  set  a  target,  or  volume  performance  standard,  for  the 
provider.  As  discussed  above,  we  explored  measures  of  RPUPS  based  on  physician  and  supplier 
services,  and  all  Medicare-covered  services. 

The  most  straightforward  implementation  of  GVPS,  from  a  regulatory  point  of  view, 
might  involve  just  the  services  under  the  current  MVPS  (i.e.,  most  physician,  professional  and 
supplier  services).  The  Federal  government  already  specifies  rates  of  increase  for  those  services. 


Figure  3:  RPUPS  Values  for  Physician  and  Supplier  Services,  as  a  Percentage  of  RPUPS  Values 

for  All  Services 


1    3    5   7    9  11  13  15  17  19  21  23  25  27  29  31  33  35  37  39  41  43  45  47  49  51  53  56  57  59  61  63  65  67  69  71  73  75  77 

Provider 

Source:  National  Claims  History  file,  1992. 

Note:  Reimbursements  per  Unique  Patient  Seen  (RPUPS)  are  the  mean  Medicare  reimbursements  for  Medicare  patients  seen  by  the  provider, 
unadjusted  for  case  mix  or  geographic  differences  in  prices. 


Figure  4:  Reimbursements  to  Provider  vs.  All  Physician  and  Supplier  Reimbursements 

(Patient  Capture  Ratio) 


0.6 


0.5 


0.4 


0.3 


0.2 


0.1 


|l,l|U|l.l|U|UjU|U,U|l.l|UiLI|l.l|l,l|l,l|ll|l,l|l.l|IJ|Ui 


|I.I|U|I,I|M|I,I|I,I|I,I|I,I|I,I|1,I|I.I,I,I| 


1    3    5    7    9   11  13  15  17  19  21  23  25  27  29  31  33  35  37  39  41  43  45  47  49  51  53  55  .57  59  61  63  65  67  69  71  73  75  77 


Source:  National  Claims  History  file,  1992. 


Provider 


22 


and  GVPS  could  be  adapted  from  The  national  performance  standards.  One  difference  would  be 
to  remove  that  portion  of  the  total  increase  attributable  to  growth  in  the  number  of  Medicare 
beneficiaries,  since  volume  is  measured  per  person  under  GVPS. 

However,  the  GVPS  alternatives  would  allow  HCFA  to  introduce  incentives  for  providers 
to  manage  care.  Consideration  needs  to  be  given  to  the  appropriate  scope  of  services.  Health 
care  delivery  systems  of  today  often  are  more  vertically  integrated  and  include  primary  care, 
tertiary  care,  facilities,  etc.  For  hospital  and  other  institutional  services,  HCFA  would  need  to 
expand  the  MVPS  concept.  Presumably,  HCFA  would  set  targets  that  were  commensurate  with 
the  standards  for  physician  and  supplier  services.  In  other  words,  similar  actuarial  principles  or 
policy  objectives  would  be  embodied  in  the  methods  and  data  used  for  the  different  categories  of 
services.  HCFA  could  use  projections  that  are  involved  in  setting  Adjusted  Average  Per  Capita 
Cost  (AAPCC)  rates  for  Medicare  payments  to  HMOs. 

Although  MVPS  is  now  limited  to  physician  and  supplier  services,  more  substantial  cost 
increases  are  occurring  for  other  services  (see  discussion  below).  This  adds  another  practical 
advantage  to  expanding  GVPS  to  include  all  Medicare-covered  services,  and  to  give  physicians 
incentives  to  manage  the  whole  range  of  services  for  their  patients. 

B.       Differential  Growth  Rates  Based  on  Location 

Under  MVPS,  the  Federal  government  specifies  national  rates  of  increase  for  the  coming 
year.  The  current  MVPS  does  not  explicitly  account  for  geographic  variations  in  the  factors 
underlying  the  national  performance  standards.  Targets  are  set  and  performance  is  monitored  at 
the  national  level  only.  This  is  consistent  with  MVPS  being  a  budget  tool  and  not  an  incentive 
system.  Total  spending  for  those  services  is  governed,  even  though  actual  rates  of  increase  can 
differ  among  regions  and  local  areas.  Between  1990  and  1991,  expenditures  per  Medicare 
enroUee  for  physician  and  supplier  services  actually  fell  in  several  states,  and  grew  by  as  much  as 
21  percent  (in  Nebraska).  The  nation  averaged  a  4-percent  increase  during  this  period  (PPRC, 
1993). 

Moving  to  genuine  incentive  systems  may  require  that  more  consideration  be  given  to 
appropriate  geographic  differences  in  the  target  rates  of  increase.  A  national  target  is  a  weighted 
average  of  local  differences,  and  does  not  conform  to  the  local  perspectives  of  states,  coimties, 
cities,  or  providers.  The  target  rate  of  increase  should  reflect  a  level  of  expectation  that  is 
consistent  across  sites  in  different  geographic  areas.  A  provider  should  not  win  or  lose  under 
GVPS  simply  because  of  its  location. 

At  the  other  extreme,  target  rates  of  increase  perhaps  should  not  be  based  solely  on  the 
historical  experience  of  the  provider.  Basing  rates  on  lower  (higher)  rates  of  growth  by  a 
provider  would  tend  to  penalize  (reward)  historical  efficiency  (inefficiency).  A  challenge  vmder 
GVPS  will  be  to  define  actuarial  reference  populations  that  reflect  relevant  local  trends  but  do 
not  focus  too  closely  on  the  provider's  own  experience.  In  this  study  we  operationalize  the 


23 


concept  of  targets  using  data  in  our  study  files.  We  compare  average  increases  within  markets 
areas  to  rates  of  change  at  the  provider  level.  This  allows  us  to  examine  the  stability  and  rates  of 
change  in  RPUPS  at  the  provider  levels. 

Table  2  shows  the  rates  of  growth  in  Medicare  reimbursement  rates  per  patient  for  the 
random  samples  of  beneficiaries  drawn  from  each  of  the  ten  market  areas."  Generally,  there  were 
much  greater  increases  for  all  services  compared  to  physician  and  supplier  services,  and  greater 
increases  between  1991  and  1992  than  between  1992  and  1993.  For  physician  and  supplier 
services  from  1991  to  1993,  larger  increases  occurred  in  Massachusetts  (8%),  Michigan  and 
Peimsylvania  (4%),  Florida  (3%),  and  Minnesota  (2%).  Lower  increases  occurred  in  Ohio  (-2%), 
Arizona  (0%),  Louisiana  (1%)  and  New  Mexico  (1%).  Between  1991  and  1993,  larger  increases 

Table  2:  Rates  of  Change  for  Medicare  Reimbursements  Per  Enrollee 


State  Market  Area  Physician  and  Supplier  Services  All  Medicare  Services 


92/91 

93/92 

93/91 

92/91 

93/92 

?3/?l 

AZ 

1.00 

1.00 

1.00 

1.04 

1.02 

1.06 

FL 

0.99 

■  1.05 

1.03 

1.14 

1.09 

1.25 

LA 

0.98 

1.02 

1.01 

1.13 

1.07 

1.21 

MA 

1.03 

1.04 

1.08 

1.14 

1.09 

1.24 

MI 

1.03 

1.00 

1.04 

1.15 

1.06 

1.22 

MN 

1.00 

1.02 

1.02 

1.09 

1.03 

1.13 

NM 

1.00 

1.01 

1.01 

1.11 

1.06 

1.18 

OH 

l.OI 

0.97 

0.98 

1.11 

1.01 

1.12 

PA 

1.05 

0.99 

1.04 

1.15 

1.04 

1.20 

Source:  National  Claims  History  file,  1991-1993. 

*  Appendix  B  contains  maps  showing  the  3-digit  ZIP  Code  areas  selected  from  each  state. 


Our  advisory  committee  had  major  sites  in  eleven  states,  including  Texas  and  New  York. 
Data  problems  generally  precluded  us  from  analyzing  trends  in  Texas,  including  Scott  &  White 
Clinic.  We  did  not  include  the  providers  in  rural  New  York  (Upper  Hudson  Primary  Care 
Consortium,  etc.)  in  this  report  because  of  our  emphasis  on  large,  multispecialty  groups.  Lahey 
Clinic  and  Fallon  Clinic  are  in  Massachusetts. .  Although  there  was  only  a  modest  overlap  in  their 
service  areas,  we  combined  the  two  Massachusetts  areas  when  calculating  market  level  trends. 


24 


for  all  Medicare  services  occurredln  Florida  (25%),  Massachusetts  (24%),  Michigan  (22%),  Louisiana 
(21%),  Pennsylvania  (20%),  and  New  Mexico  (18%).  Lower  increases  occurred  in  Arizona  (6%),  Ohio 
(12%),  and  Minnesota  (13%). 

These  differences  reveal  the  problems  associated  with  national  average  target  rates  of  increase. 
Faced  with  a  national  average  target  rate  of  increase,  a  provider  in  Arizona  would  have  less  difficulty 
than  a  provider  in  Massachusetts,  for  example.  Therefore,  the  target  should  reflect  local  market 
conditions  for  the  provider,  and/or  the  growth  rates  in  market  areas  where  patients  reside.  For  most 
providers,  these  two  alternatives  are  virtually  the  same.  However,  for  other  providers  this  could  be  a 
worthwhile  distinction.  For  example,  some  providers  are  located  in  tourist  or  seasonal  migration  areas 
and  serve  a  significant  number  of  patients  who  live  elsewhere  for  much  of  the  year.  Other  providers  are 
regional  or  national  medical  centers  that  serve  patients  from  all  over  the  world,  and  Medicare  patients 
from  all  over  the  country. 

Observed  differences  in  growth  rates  between  areas  probably  reflect  both  random  variations,  and 
short  term  or  long  term  systematic  factors.  The  difficulty  forecasting  short  term  growth  rates  for  a 
particular  area  is  not  limited  to  HCFA  and  Medicare.  Private  and  public  insurers  have  to  forecast  fiiture 
incidence  rates  of  illness,  changes  in  practice  patterns,  and  utilization  rates  for  enrollees.  Managed  care 
organizations  and  other  providers  with  a  watchful  eye  on  utilization  patterns,  however,  can  exert  some 
control  over  patterns  of  change  over  time. 

HCFA  addresses  this  issue  explicitly  in  its  payment  system  for  HMO  risk  contractors,  the 
AAPCC,  which  bases  rates  on  the  enroUee's  county  of  residence.^  Annual  rates  of  increase  for  each 
county  in  the  nation  are  derived  fi-om  the  average  national  increase  times  a  five-year  average  of  the  ratio 
of  county  to  national  reimbursement  rates.  As  reimbursement  rates  in  a  county  show  systematic  changes 
in  relation  to  national  trends,  the  historical  ratio  changes,  affecting  the  forecasts  for  that  county.  At  the 
same  time,  the  five-year  moving  average  smooths  out  the  effects  of  year-to-year  stochastic  variations  in 
the  ratio.  This  approach  involves  forecasting  error,  but  over  several  years  the  predictions  are  fairly 
accurate.  Difficulties  in  forecasting  short  term  utilization  outcomes  also  support  using  longer  term, 
cumulative  targets  (discussed  below). 

HCFA  could  apply  the  AAPCC  approach  on  a  county  basis,  as  it  does  for  capitation  rates 
for  aged  and  disabled.  Alternatively,  HCFA  could  choose  other  geographic  areas,  such  as  the 
state,  which  underlies  capitaUon  payment  rates  for  ESRD  beneficiaries.  Because  HMOs  enroll 
Medicare  beneficiaries  fi-om  more  than  one  geographic  area  (i.e.,  county),  their  payments  reflect 
the  geographic  dispersion  of  enrollees.  So,  too,  HCFA  could  adjust  national  projecfions  to 
specific  provider  organizations  by  applying  the  data  and  methods  underlying  AAPCC  rate 
projections,  using  a  set  of  counties  that  are  relevant  to  that  provider  (as  with  each  HMO).  There 
are  alternatives  for  defining  relevant  geographic  areas,  such  as: 


^HCFA  sets  AAPCC  rates  at  the  state  level  for  ESRD  beneficiaries. 


25 


•  Whole  state(s), 

•  Counties, 

•  Metropolitan  Statistical  Areas  and  designated  rural  areas,  and/or  ZIP  Code  areas. 
HCFA  has  alternatives  for  deciding  which  states,  counties,  etc.  to  use  for  a  particular  group: 

•  Within  a  specified  radius  of  the  provider's  service  delivery  sites, 

•  Where  the  provider  has  service  delivery  sites, 

•  Areas  a  significant  proportion  of  the  provider's  Medicare  patients  reside,  or 

•  Each  area  where  at  least  one  Medicare  patient  seen  by  the  provider  resided. 

For  the  empirical  results  presented  below,  we  used  a  random  sample  of  beneficiaries  drawn  from 
the  market  areas  for  each  provider.  The  market  areas  included  the  three-digit  ZIP  Code  areas  in 
which  at  least  5  percent  of  Medicare  patients  resided  who  were  seen  by  the  original  or  "nucleus" 
site.*  On  the  NCH  files,  the  only  geographic  identifier  that  beneficiaries  and  providers  have  in 
common  is  the  ZIP  Code. 

C.       Provider  Level  Versus  Market  Level  Changes 

In  addition  to  addressing  differences  in  growth  rates  at  the  market  level,  it  is  necessary  to 
investigate  whether  measures  of  average  resource  consumption,  specifically  RPUPS,  are 
sufficiently  stable  at  the  provider  level.  Do  the  values  of  RPUPS  "jump  around"  due  to  random 
factors  to  such  a  degree  that  targets  based  on  a  previous  year  are  meaningless?  Or,  do  changes  in 
RPUPS  bear  systematic  resemblance  to  market  level  changes  in  reimbursement  rates? 

We  examined  these  questions  using  the  provider  samples  described  earlier,  and  in 
Appendix  B.  Average  market  level  changes  were  estimated  using  the  random  samples  of 
beneficiaries  drawn  from  each  of  the  areas.  The  resulting  rates  of  change  were  shown 
previously,  in  Table  2.  We  now  compare  the  changes  for  each  provider  to  the  applicable  rates  of 
change  at  the  market  level. 


*We  found  significant  geographic  clustering  of  most  patients  around  the  sample 
providers.  Although  the  five-percent  rule  strictly  applies  only  to  the  ten  (advisory  committee) 
sites,  the  geographic  market  areas  probably  are  a  reasonable  approximation  of  the  market  areas 
served  by  the  78  providers. 


26 


Figure  5  shows  results  for-eomparisons  betAveen  the  average  market  level  changes  and 
provider  level  changes  between  1991  and  1992.  The  origin  of  the  axes  represents  a  perfect 
prediction  for  changes  in  the  value  of  a  provider's  RPUPS  based  on  average  changes  at  the 
market  level.  The  horizontal  axis  shows  deviations  from  the  target  for  physician  and  supplier 
services;  the  vertical  axis  shows  deviations  from  the  target  for  all  Medicare  services.  Recall  that 
these  providers  were  selected  nonrandomly,  and  each  typically  represents  a  small  percentage  of 
beneficiaries  in  each  area.  Consequently,  the  average  provider's  rate  of  change  need  not 
automatically  correspond  closely  to  the  average  market  level  rate  of  change. 

There  is  a  significant  concentration  of  providers  in  the  third  quadrant,  i.e.,  where  the 
actual  growth  rates  at  the  provider  level  were  less  than  the  average  change  for  the  market.  The 
second  largest  concentration  is  in  the  first  quadrant,  reflecting  higher  rates  of  change  for  the 
provider  than  is  average  for  its  market.  Perhaps  most  encouraging  is  that  the  large  majority  of 
providers  are  huddled  within  plus  or  minus  10  percent  of  the  origin  on  both  axes.  The  providers' 
average  unweighted  absolute  deviation  from  the  relevant  target  was  4.6  percent  for  physician  and 
supplier  reimbursements,  and  6.2  percent  for  total  Medicare  reimbursements. 

There  are  at  least  two  points  that  deviate  substantially  from  the  market  average  rates  of 
increase.  These  are  marked  Points  A  and  B  on  Figure  5.  These  are  not  among  our  primary  sites, 
and  we  do  not  know  a  great  deal  about  them  at  this  time.  However,  we  do  know  that  Provider  A 
saw  63  percent  fewer  Medicare  patients  in  1992  as  compared  to  1991.  Similarly,  Provider  B  saw 
58  percent  more  Medicare  patients  in  1992,  compared  to  1991.  In  contrast,  the  average  absolute 
percentage  change  in  the  number  of  patients  seen  for  the  remaining  providers  was  13.5  percent. 
Removing  Providers  A  and  B  reduces  the  unweighted  average  absolute  percentage  deviation 
from  the  relevant  target  from  4.6  percent  to  3.9  percent  for  physician  and  supplier 
reimbursements,  and  from  6.2  percent  to  5.4  percent  for  total  Medicare  reimbursements. 

Figure  6  shows  similar  results  using  values  of  RPUPS  for  1992  predicting  1993.  Once 
again,  there  is  a  cluster  of  points  deviating  from  both  targets  by  only  single-digit  percentages, 
and  a  smaller  group  with  larger  deviations.  Several  of  the  "outliers"  are  marked  as  Providers  C 
through  H.  Not  being  any  of  the  providers  with  whom  we  have  worked,  again  we  know 
comparatively  little  about  them.  Only  one  of  them  saw  more  than  4,000  beneficiaries  in  1993 
(Provider  C),  while  one  saw  only  about  400  (Provider  F),  a  substantial  drop  from  the  number 
seen  in  1992.  In  general,  these  providers  had  large  changes  between  the  years  in  the  number  of 
Medicare  patients  seen.  For  example.  Provider  C  served  nearly  three  times  the  number  of 
beneficiaries  in  1993,  as  compared  to  1992. 

We  suspect  that  these  (and  other)  providers  have  undergone  significant  changes  in  their 
size  and  composition  over  time.  The  resulting  "shock"  to  the  values  of  RPUPS  from  unseen 
changes  in  the  providers  is  less  of  a  policy  or  data  concern  at  this  time,  but  more  likely  serves  to 
highlight  the  limitations  of  observing  organizations  over  time  using  a  single  identifier.  We 
presume,  accordingly,  that  when  physician  groups  work  with  HCFA  under  GVPS,  information 
routinely  given  to  HCFA  will  include  changes  in  their  organizational  composition.  For  example. 


Figure  5:  Deviations  from  Targets  for  78  Providers  in  10  Market  Areas:  1991  to  1992 


c 

0) 

E 
<u 
(/) 

u. 
X) 

E 

0) 

cn 

"to 
o 


O) 

I  

H 

E 
o 


in 
c 
g 

• 

TO 
'> 

0) 
Q 

(U 

O)  1 

ni 
■*-' 

c 

(U 

o 

i_ 
0) 

a. 


0.4 


0.3 


0.2 


A 


♦ 


-0.2 


B 


-0.1 


-0.2 


0.1 


0.2 


0.3 


0.4 


Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements 


Source:  NCH  file.  1991  and  1992. 

Note:  Uitlization  measures  for  markets  and  providers  are  Reimbursements  Per  Unique  Patient  Seen  (RPUPS). 


00 

CM 


Figure  6:  Deviations  from  Targets  for  78  Providers  in  10  Market  Areas:  1992  to  1993 


Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements  ► 


Source:  NCH  file.  1992  and  1993. 

Note:  Uitlization  measures  for  markets  and  providers  are  Reimbursements  Per  Unique  Patient  Seen  (RPUPS). 


29 


health  systems  around  the  nation  have  been  acquiring  primary  group  practices.  When  this 
happens,  such  a  group  would  inform  HCFA  of  the  change.  Services  provided  through  the  newly 
acquired  primary  care  practice  would  be  folded  into  the  values  of  RPUPS  for  baseline  and 
performance  periods  so  that  abrupt  changes  do  not  invalidate  the  target. 

Figures  7  and  8  show  results  for  ten  of  the  original  physician  groups  with  whom  we  have 
worked  during  this  study.  For  these  providers,  the  actual  RPUPS  in  the  second  year  ranges  from 
about  4  percent  higher  than  the  target  to  about  7  percent  less  than  the  target.  From  1991  to  1992, 
five  of  the  ten  providers  were  in  the  third  quadrant;  from  1992  to  1993,  seven  of  the  ten  providers 
were  in  the  third  quadrant.  Of  the  three  groups  in  other  quadrants  (Groups  M,  N  and  O),  two 
were  also  outside  the  third  quadrant  in  Figure  7  (M  and  O). 

D.       Cumulative  Versus  Year-to-Year  Targets 

MVPS  has  been  implemented  on  a  year-to-year  basis.  This  approach  is  relatively 
"forgiving"  in  that  actuarial  projections  underlying  the  expenditure  targets  take  into  account  the 
most  recent  utilization  patterns.  There  are  proposals  to  designate  a  base  year  and  make  future 
targets  (and  penalties)  cumulative.  Long  run  cost  control  may  be  achieved  more  reliably  if  target 
rates  of  increase  in  Medicare  expenditures  are  set  with  respect  to  a  specific  baseline  year.  For 
example,  the  target  for  Year  2  could  be  specified  as  5  percent  above  expenditure  levels  in  Year  1; 
the  target  for  Year  3  could  be  1 0  percent  above  expenditure  levels  in  Year  1 ,  without  regard  to 
actual  expenditures  in  Year  2. 

For  GVPS,  each  approach  has  advantages:  cumulative  targets  could  better  reward 
successful  groups,  while  year-to-year  targets  may  encourage  more  groups  to  "give  it  another  try" 
each  year.  The  ability  of  physician  groups  to  alter  utilization  patterns  may  vary  from  one  year  to 
the  next.  Sizable  efficiencies  in  one  year  may  be  followed  by  less  relative  change  in  the  next 
year.  If  the  group  was  still  ahead  of  the  average,  its  relative  efficiency  still  could  be  rewarded 
through  cumulative  targets.  If  targets  are  always  based  on  the  most  recent  data,  then  the  target 
each  year  would  be  reduced  in  accordance  with  the  improved  efficiency.  Consequently,  rewards 
would  be  harder  to  generate.  Groups  might  have  to  "pace  themselves"  with  incremental 
improverhents  each  year  in  order  to  achieve  the  same  rewards  for  cumulative  gains  that  would 
occur  using  cumulative  targets. 

On  the  other  hand,  participating  groups  that  fail  to  meet  targets  in  the  early  years  would 
find  it  more  difficult  to  "get  below"  the  cumulative  target.  This  has  two  aspects.  First,  if  a  group 
really  tries  to  manage  services  but  has  higher  than  average  growth  rates,  it  may  conclude  that 
meeting  future  cumulative  targets  is  unlikely.  Second,  HCFA  could  track  cumulative  savings  (or 
deficits)  for  the  group  and  not  pay  rewards  unless  or  until  cumulative  savings  are  positive.  If  a 
group  accumulates  a  deficit,  it  may  conclude  that  the  present  value  of  future  reward  payments  is 
very  low.  Furthermore,  if  special  penalties  await  groups  that  fail  to  meet  their  targets  (discussed 
below),  participation  under  GVPS  could  be  brief. 


o 

CO 


Figure  7:  Deviations  from  Targets  for  10  Selected  Providers:  1991  to  1992 

 0^6- 


c 

0) 

E 
{2 


^  -0 
i2 


«» 

c 
g 

n 
■> 

0) 

Q 

0) 


0.04 


0.02 


M 
♦ 


^7 


a. 


-0.06 


-0.05  -0,04 


-0.03 


-0.02 
J 


K* 


N 


-0.01 


51 


-0.02 


-0.04 


-0.06 


-OtOS- 


Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements 


Source:  NCH  file,  1991  and  1992. 


Figure  8:  Deviations  from  Targets  for  10  Selected  Providers:  1992  to  1993 


-0t04- 


c 
E 

0) 

!2 

3 

E 
■<u 
cd 

ro 
o 


0) 
(0 


E 
o 

c 
o 

ra 

■>■ 

0) 
T3 

0) 
O) 

ro 
c 

(U 

ij 

CL 


08 


-0.07 


K 


-0.06 


J 
♦ 


P 
♦ 


-0.05 


-0.04 


1/r 


0.02 


O 


-0.03  -0.02  ♦-O.O! 

R 


-0.02 


-0.04 


-0.06 


-0.08 


-0.1 


-0r45- 


0.01 


N 


Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements      — ^ 


Source:  NCH  file,  1992  and  1993. 


32 


Figure  9  shows  the  results'of  predicting  RPUPS  for  1993  by  multiplying  RPUPS  for  1991 
times  cimiulative  rates  of  increase  for  each  respective  market  area.  Since  these  are  the  same 
providers  shown  earlier,  the  deviations  are  additive.  If  providers'  deviations  from  market 
averages  continued  in  the  same  direction  (higher  or  lower  than  the  market),  the  data  points  would 
tend  to  move  away  from  the  origin  (the  market  prediction).  If  deviations  were  more  random  and 
therefore  canceled  out  over  time,  the  points  would  be  closer  to  the  origin  after  two  years  than  the 
one-year  comparisons.  In  general,  the  cumulative  deviations  tended  to  be  larger  (8.1  percent  for 
physician/supplier  services,  and  9.5  percent  for  all  Medicare  services)  than  for  the  one-year 
targets  (4.6  percent  for  physician/supplier  services,  and  6.2  percent  for  all  Medicare  services). 
The  aforementioned  specific  points  that  changed  significantly  during  this  period  (i.e.,  A  through 
H)  are  shown  again  in  Figure  9. 

Figure  10  shows  the  cumulative  targets  for  the  10  selected  physician  groups.  Eight  out  of 
the  10  providers  were  in  the  third  quadrant,  indicating  lower  rates  of  increase  compared  to  the 
average  market  changes,  for  both  physician/supplier  services  and  all  Medicare  services.  Only 
Providers  M  and  O  were  above  their  respective  market  level  rates  of  increase  for  either  scope  of 
service.  Most  of  these  multispecialty  group  practices  appear  to  be  manifesting  lower  rates  of 
growth  than  is  average  for  their  respective  market  areas. 

The  approach  of  a  cumulative  target  may  be  workable,  given  the  reasonable  stability  of 
provider  level  measures  of  RPUPS  relative  to  the  market  level  random  samples.  A  cumulative 
target  embodies  more  frilly  the  principle  behind  payment  system  reform,  namely  to  set  in  place 
incentive  systems  that  work  toward  long  run  cost  containment.  Perhaps  HCFA  could  introduce 
ftirther  refinements  of  this  approach,  such  as  fixing  any  errors  that  may  have  resulted  in  the 
process  of  setting  targets.  Examples  would  be  to  adjust  for  errors  made  in  forecasting  exogenous 
factors  such  as  the  rate  of  inflation  or  growth  in  gross  domestic  product,  if  these  are  factors 
HCFA  would  use  in  setting  targets. 

Another  issue  is  selecting  the  base  period  from  which  to  make  projections.  For  a  policy 
that  begins  soon,  the  latest  data  available  would  be  for  1993  or  1994.  Some  groups  may  prefer  to 
use  an  earlier  year  because  they  have  implemented  a  number  of  managed  care  systems  in  recent 
years  and  would  prefer  credit  for  these  achievements.  The  earliest  HCFA  probably  would 
consider  is  1992,  because  so  many  changes  have  taken  place  in  reimbursement  policy  (e.g.,  the 
MFS)  since  1991.  A  related  issue  is  whether  and  when  to  "rebase,"  i.e.,  to  choose  another  actual 
year  of  data  from  which  to  make  further  cumulative  targets.  We  recommend  that  HCFA  wait 
before  deciding  when  to  rebase  the  GVPS,  and  simultaneously  consider  ways  to  measure  cross- 
sectional  differences  in  RPUPS.  Including  methods  for  recognizing  differences  in  efficiency 
within  a  given  time  period  could  help  avoid  the  problem  of  lowering  targets  for  physician  groups 
essentially  because  of  their  successes  to  date. 


en 


tn 
c 

0) 

E 

0) 
X> 

E 
<u 
oc 

3 
o 


0) 
O) 

.ro 


E 
o 

C 

g 
*■*-« 

(0 

■> 

lU 

Q 

0) 

cn 
ni 

•4-* 

c 

0) 

t> 

0) 
Q. 


Figure  9:  Deviations  form  Targets  for  78  Providers  in  10  Market  Areas:  1991  to  1993 

 0:6- 


-0.4 


B 


0.4 


0.2 


-0.2 


H 


♦ 

♦  ♦ 


— -  ♦  ♦-"o^ 


-0.2 


-0.4 


0.2 


0.4 


Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements  ^ 

Source:  NCH  file,  1991  and  1993. 


14 


Figure  10:  Deviations  from  Targets  for  10  Selected  Providers:  1991  to  1993 


-0.12 


-0.1 


-0.08 


K 


-0.06 


R 


-0.04 


-0.02 


-0.Q5- 


N 

-0.05* 


-0.1 


-0.15 


M 


Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements  ^ 


Source:  NCH  file.  1991  and  1993. 


35 


VIII.    Rewards  and  Penalties  ' 

A.  Policy  Questions  and  Objectives 

The  potential  economic  consequences  of  GVPS  for  physician  groups  and  for  HCFA  are 
discussed  in  this  section.  The  factors  that  determine  the  economic  results  of  GVPS  have  to  do 
with  the  incentives  and  financial  transactions  related  to  rewards  and  penalties. 

The  MVPS  system  links  physicians'  fees  to  national  aggregate  expenditures  in  order  to 
recoup  excessive  payments.  In  that  context,  penalties  are  instrumental  in  achieving  budgetary 
goals.  As  alternatives  to  the  current  national  approach  are  considered,  the  role  of  rewards  and 
penalties  needs  to  be  assessed  carefully.  In  particular, 

►  Should  voluntary  participants  face  potential  penalties  that  exceed  those  imposed  on  other 
physicians? 

►  How  could  the  amounts  of  the  rewards  or  penalties  be  determined? 

►  What  are  the  sources  of  funding  for  rewards,  assuming  budget  neutrality? 

►  What  mechanisms  could  be  used  to  administer  rewards  and/or  penalties? 

The  policies  chosen  in  response  to  these  questions  presvraiably  ought  to  reflect  the 
assumptions  behind,  and  the  objectives  for,  GVPS.  Our  discussion  assumes  that  HCFA  would 
desire  to: 

»•        Encourage  participation  among  qualified  providers  if  broad  participation  would  achieve 
the  largest  savings  for  Medicare, 

*■        Encourage  and  reward  successful  improvements  in  the  efficiency  of  practice — an 
ingredient  normally  missing  in  the  fee-for-service  sector,  and  possibly  to 

►  Encourage  beneficiaries  to  receive  care  fi-om  the  most  efficient  providers. 

The  remainder  of  this  section  addresses  the  policy  issues  involving  rewards  and  penalties  for 
groups  under  GVPS  specifically,  and  under  MVPS  generally. 

B.  Options  for  Rewards  and  Penalties 

The  table  below  conveys  four  general  scenarios  that  could  occur  if  a  GVPS  option  were 
available.  The  scenarios  are  defined  in  terms  of  whether  a  hypothetical  participating  group 
and/or  physicians  nationally  meet  their  designated  expenditure  targets. 


36 


GVPS  Met? 

National  MVPS  Met? 

Yes 

No 

Yes 

Both  targets  met 

Only  group  target  met 

No 

Only  national  target  met 

Neither  target  met 

Without  GVPS,  there  are  two  observed  scenarios:  the  nation  does  or  does  not  meet  the 
performance  standard(s).  Although  individual  groups  may  be  improving  their  efficiency  relative 
to  the  average  even  without  explicit  incentives,  these  differentials  are  unobserved  and 
unrecognized.  In  addition,  the  adoption  of  GVPS  could  help  to  foster  improvements  in 
efficiency  among  some  or  all  participants,  which  would  be  observable  as  the  four  scenarios 
portrayed  above.  There  also  is  the  issue  of  how  much  the  actual  outcomes  differed  from  the 
respective  targets,  which  can  be  included  in  deciding  the  amount  of  the  rewards  or  penalties. 

In  principle,  it  may  be  advantageous  to  differentiate  all  physician  groups,  and  assess  their 
volume  performance  separately.  In  jjractice,  there  are  administrative  and  other  factors  that  might 
make  that  goal  unattainable.  HCFA  may  wish  to  assess  the  volume  performance  of  qualified, 
selected  groups  separately,  and  the  remaining  providers  together  as  an  undifferentiated  group.  It 
also  may  be  desirable,  in  principle,  to  reward  or  penalize  each  group  that  is  differentiated  under 
its  own  performance  standard,  including  the  residual  physician  population.  However,  at  this 
point,  Congress  has  called  for  potential  differentiation  on  a  voluntary  basis.  Among  our  advisory 
committee,  we  found  that  models  with  penalties  concentrated  on  groups  that  fail  to  meet  their 
target  might  be  acceptable  to  some  physician  organizations,  but  not  to  others.  We  offer  model 
variations  with  and  without  concentrated  penalties  for  volunteering  organizations. 

The  options  associated  with  successful  performance  of  groups  under  GVPS  include  to: 

►  Avoid  or  refund  blanket  penalties  that  occur  under  MVPS,  without  giving  extra 
rewards.  Groups  could  be  exempted  from  any  general  penalties  imposed  on  physicians' 
fees  in  the  event  of  unfavorable  national  performance. 

►  Avoid  or  refund  blanket  penalties,  and  give  extra  rewards.  Groups  could  earn 
rewards  in  addition  to  avoiding  penalties.  This  could  provide  extra  incentives  for 
participation,  and  reward  efficiency  for  services  other  than  physician  services  (e.g., 
hospital  savings). 

►  Give  extra  rewards,  without  avoiding  or  refunding  blanket  penalties.  Groups  could 
be  rewarded  for  their  observed  successes,  but  still  be  subjected  to  penahies  that  apply  to 
all  physicians  in  the  nation. 


37 


The  options  associated  with  unsuccessful  performance  of  groups  under  GVPS  include  to: 

*■        Limit  penalties  to  any  changes  in  the  national  conversion  factors.  In  the  event  a 
group  fails  to  meet  its  target,  the  group  could  receive  the  same  penalties  (if  any)  as 
physicians  in  the  national  pool.  For  example,  the  single  national  conversion  factor(s) 
would  apply  to  the  group,  and  no  offsetting  financial  reward  would  be  forthcoming.  This 
is  equivalent  to  a  "hold  harmless"  provision  for  GVPS. 

»•        Impose  concentrated  penalties.  An  alternative  would  be  to  impose  penalties  on 
participating  groups  that  fail  to  meet  their  own  targets.  This  could  be  justified  as  an 
additional  incentive  for  efficiency.  Alternatively,  this  may  be  viewed  as  an  equitable 
punishment  for  allov^ng  Medicare  expenditures  to  rise  faster  than  the  Federal 
government's  specified  rate.  A  third  reason  may  be  perceived  equity  fi-om  symmetry  of 
upside  and  downside  risks.  Fourthly,  HCFA  may  wish  to  establish  each  group  as  a 
separate  population,  between  which  there  is  no  subsidization  of  penalty  amounts.  Lastly, 
concentrated  penalties  may  deter  participation  by  groups  that  are  not  likely  to  succeed, 
saving  administrative  costs.  This  would  function  similar  to  eligibility  criteria,  i.e.,  to 
limit  participation  to  the  groups  most  likely  to  succeed. 

Refunding  national  fee  penalties  to  groups  that  met  their  own  GVPS  would  help  to 
achieve  equity  in  payment.  Rewards  and/or  penalties  could  be  implemented  in  order  to  achieve 
equity  in  payment,  to  help  induce  efficiencies,  or  to  affect  participation  patterns  among  groups. 
Sharing  the  program  savings  with  groups  that  beat  their  own  GVPS  would  instill  fundamental 
changes  in  the  incentive  structure  that  exists  under  fee-for-service.  In  either  case,  implementing 
a  GVPS  model  that  allows  for  potential  rewards  but  not  concentrated  penalties  may  stimulate 
many  physician  organizations  to  volunteer  for  GVPS.  In  that  context,  non-participation  may 
result  from  factors  such  as: 

►  Insufficient  interest  (e.g.,  proportionally  few  Medicare  patients), 

►  Failure  to  meet  other  criteria  for  qualification  (e.g.,  narrow  scope  of  practice),  or 

►  No  desire  to  encourage  scrutiny  of  utilization  patterns. 

There  may  be  a  connection  between  the  attractiveness  of  concentrated  penalties  and  the 
method  for  setting  targets  (i.e.,  cumulative  versus  rebasing  each  year),  and  the  method  for 
estimating  Medicare  Savings  (i.e.,  cumulative  and/or  yearly).  Rebasing  a  group's  target  each 
year  based  on  actual  utilization — in  the  absence  of  potential  concentrated  penalties — might  lead 
to  incentives  for  the  group  to  inflate  its  base  in  some  years,  alternating  with  years  of  reaping 
rewards  for  artificial  savings.  Penalties  could  reduce  the  benefit  of  this  ploy.  Similarly, 
cumulative  targets  could  create  a  natural  penalty  situation  when  a  group  inflated  utilization  rates 


38 


unless  a  provider  was  able  to  chum  patients  "at  will"  and  yet  demonstrate  long  run  relative 
efficiency.  The  potential  benefit  of  gaming  could  be  reduced  even  ftirther  if  HCFA  paid  rewards 
to  a  provider  only  if  cumulative  Medicare  Savings  were  positive. 

If  the  GVPS  option  is  adopted  by  greater  numbers  of  physician  organizations,  the 
imdifferentiated  physician  population  would  become  smaller.  Over  time,  the  existing  GVPS 
groups  could  grow  in  size  as  well.  HCFA  may  choose  later  to  end  "hold  harmless"  provisions 
for  groups  operating  under  GVPS  (i.e.,  add  concentrated  penalties).  Criteria  could  include  the 
number  of  beneficiaries  seen  or  the  nimiber  of  years  operating  imder  GVPS.  In  the  mean  time, 
some  groups  may  choose  to  face  potential  penalties  in  exchange  for  a  higher  share  of  the  savings 
generated  under  GVPS. 

C.       Reward  and  Penalty  Formulas 

Under  GVPS,  providers  would  continue  to  be  paid  according  to  HCFA's  standard 
payment  policies  for  all  types  and  places  of  service.  There  may  be  additional  economic 
consequences  for  providers,  depending  on  their  own  performance,  the  national  performance 
under  MVPS,  and  other  potential  long-term  cost  control  policies.  This  section  discusses  methods 
for  determining  the  value  of  savings,  rewards  and  penalties  under  GVPS. 

Success  iinder  GVPS  means  not  exceeding  the  target  rate  of  increase  specified  by  HCFA, 
for  this  satisfies  the  budgetary  goals  of  the  system.  Under  MVPS,  meeting  the  target  avoids 
penalties  to  fee  updates.  Similarly,  a  starting  point  for  GVPS  could  be  the  avoidance  of  financial 
penalties  for  groups  that  meet  their  own  performance  standard.  The  economic  value  of  that 
scenario  would  be  the  relative  value  units  of  the  physician  and  supplier  services  delivered  by  the 
group,  multiplied  by  the  difference  in  the  conversion  factor  caused  by  the  national  penalty.  A 
lump  sum  payment  to  the  group  could  offset  the  lost  revenue  due  to  lower  Medicare  payment 
levels — i.e.,  a  refund  of  the  penalty. 

The  proposed  GVPS  models  go  beyond  making  technical  corrections  to  MVPS  such  as 
refunding  the  actuarial  value  of  the  penalty.  Instead,  we  offer  policy  options  that  would  revamp 
the  incentive  structure  created  by  the  payment  system,  and  give  providers  tangible  motivation  to 
manage  patient  care  more  vigorously.  GVPS  could  evoke  a  mind  set  similar  to  capitation.  In 
addition,  GVPS  could  give  providers  a  return  on  the  investments  that  go  hand-in-hand  with 
managing  care.  Providers  carmot  make  adequate  investments  based  on  an  expected  return 
equivalent  to  the  reductions  in  updates  to  physicians'  fees. 

The  fee-for-service  payment  system  gives  more  revenue  and  higher  net  income  to 
providers  that  deliver  higher  volumes  and  intensities  of  services.  A  provider's  net  income  is 
based  on  the  difference  between  reimbursements  for  services  and  the  cost  of  providing  the 
services.  Capitation  changes  this  by  paying  providers  the  full  expected  reimbursement  level  even 
for  services  that  are  not  delivered.  Thus,  for  ayoidable  services  the  provider's  net  income 


39 


increases  by  the  gross  reimbursement  amount.  Net  income  increases  by  reducing  utilization 
rates. 

Formulas  for  rewards  and  penalties  under  GVPS  could  vary  the  incentives  and  economic 
consequences  of  providers'  performance  between  these  extremes.  The  basic  form  of  payment 
still  is  fee-for-service,  and  rewards  and  penalties  could  be  very  small  in  comparison.  This  would 
represent  perhaps  a  modest  departure  from  the  status  quo.  Alternatively,  the  rewards  and 
penalties  could  be  potentially  large  and  structured  to  more  closely  approximate  capitation. 

Methods  for  determining  the  amount  of  rewards  and  penalties  could  include  these  four 
variables: 

►  Refund.  A  provider  can  lose  revenue  because  HCFA  has  imposed  blanket  penalties  on 
prevailing  payment  rates.  Penalties  under  MVPS  force  all  physicians  to  "pay  for" 
excessive  national  Medicare  expenditure  levels.  Demonstrating  relative  efficiency  and 
meeting  HCFA's  allowable  growth  rate  under  GVPS  could  allow  a  group  to  avoid  the 
economic  consequences  of  those  penalties.  HCFA  could,  in  effect,  refund  the  group's 
penalty  payments. 

Refund  =  (Sum  of  Relative  Value  Units  for  Physician  and  Supplier  Services)  x 
(Difference  in  Conversion  Factor(s)  due  to  Penalties) 

►  Medicare  Savings.  This  is  the  amount  of  savings  estimated  from  the  observed  difference 
between  actual  and  expected  values  of  RPUPS  for  the  provider.  The  savings  are  the 
difference  between  the  reimbursement  rates,  multiplied  by  the  number  of  beneficiaries 
seen  in  the  performance  year. 

Medicare  Savings  y  =  (Target'  y  -  RPUPS  y)  ^  N  y 

where  Y  is  any  year  a  group's  performance  is  evaluated, 

Target'  is  the  predicted  RPUPS  y,  adjusted  for  differences  in  the  provider's  case 
mix  between  the  base  year  and  the  performance  year,  and 

N  is  the  number  of  Medicare  beneficiaries  who  received  physician  services  from 
the  group  (i.e.,  the  denominator  in  RPUPS  y). 

Patient  Capture  Ratio  (PCR).  This  is  the  proportion  of  reimbursements  to  all 
providers  that  went  to  the  physician  group  operating  under  GVPS,  for  patients  included  in 
the  measure  of  RPUPS.  The  PCR  may  be  defined  only  in  terms  of  physician  and  supplier 
services,  or  may  be  expanded  to  include  all  Medicare-covered  services,  in  accordance 
with  the  scope  of  services  included  in  RPUPS.  Accordingly,  a  health  system  that  owns  a 


40 


hospital  might  include  payments  to  its  hospital  in  the  numerator  (and  the  denominator)  of 
the  PCR.^ 

*■        Sharing  Rate.  HCFA  could  choose  a  particular  Sharing  Rate,  either  alone  or  in 

conjunction  with  the  PCR.  Using  a  Sharing  Rate  alone  would  recognize  the  equivalent 
value  to  Medicare  of  savings  from  intemal  efficiencies  by  the  provider  (i.e.,  reducing 
utilization  within  its  own  system),  or  external  efficiencies  (e.g.,  reducing  utilization  rates 
of  an  unaffiliated  hospital).  Using  a  Sharing  Rate  with  the  PCR  could  approximate  more 
closely  a  provider's  actual  forgone  net  income  under  GVPS,  rather  than  forgone  gross 
revenues. 

Thus,  we  specify  the  potential  formula:* 

Reward  =  Refund  +  (Medicare  Savings  x  Patient  Capture  Ratio  x  Sharing  Rate) 

GVPS  would  induce  efficient  practices  if  the  reward  system  was  like  capitation,  in  which 
reducing  utilization  increases  net  income.  The  formula  for  sharing  the  savings  could  offset 
reductions  in  revenues  by  giving  the  group  a  sufficient  proportion  of  total  observed  savings.  One 
option  would  be  to: 

*■        Pay  to  the  physician  group  the  amount  equal  to  the  Medicare  Savings  times  the  Patient 
Capture  Ratio.  (This  sets  the  Sharing  Rate  to  1 .0). 

»■        HCFA  would  keep  the  remainder  of  the  savings,  i.e.,  Medicare  Savings  times  the  inverse 
of  the  PCR. 

Reward  =  Medicare  Savings  x  Patient  Capture  Ratio  x  (1.0) 

This  approach  would  return  to  the  physician  group  all  revenues  forgone  under  fee-for-service 
resulting  from  utilization  rates  that  were  lower  than  actuarial  projections  would  indicate  for 
"average  physicians"  seeing  that  population  of  patients.  Physician  groups  would  be  treated  as 
"virtual  HMOs"  paid  a  "virtual  capitation"  that  is  prorated  according  to  the  proportion  of  the 


''We  are  exploring,  conceptually  and  empirically,  the  implications  of  expanding  the  PCR 
to  include  other  services. 

*  Refund  refers  to  the  actuarial  value  to  the  group  of  the  national  fee  penalties.  This  could  be 
added  to  any  of  the  variations  on  reward  formulas  discussed  here. 


41 


patient  population  captured  by  the' group.  HCFA  would  keep  the  remainder  of  the  savings.'  The 
physician  group  would  not  have  expected  that  revenue  in  any  event. 

Other  values  could  be  given  to  the  Sharing  Rate.  For  example,  HCFA  could: 

*-        Reduce  the  Sharing  Rate  to  some  fraction. 

Reward  =  Medicare  Savings  x  Patient  Capture  Ratio  x  (0.5) 

This  would  move  away  from  the  incentives  closely  resembling  capitation  and  toward  a  system  of 
compensating  groups  for  lower  net  income.  Another  option  would  be  to: 

Pay  to  the  physician  group  a  specified  or  negotiated  Sharing  Rate,  without  regard  to  the 
PCR. 

This  amount  could  be  set  rather  arbitrarily,  such  as  one-half,  and  applied  to  all  physician  groups. 

Reward  =  Medicare  Savings  x  (0.5) 

We  prefer  the  option  that  bases  payments  to  the  physician  group  on  the  Patient  Capture 
Ratio.  One  very  nice  property  of  this  approach  is  that  using  the  PCR  to  gauge  rewards  would 
prevent  HCFA  from  overpaying  rewards  when  beneficiaries  are  seen  by  more  than  one  provider 
under  GVPS.  Thus,  any  number  of  groups  could  be  operating  under  GVPS,  with  many  seeing 
the  same  patients,  and  total  reward  payments  would  not  be  excessive  due  to  "double  counting." 

However,  there  are  issues  that  need  to  be  considered  from  the  provider's  perspective 
about  using  the  PCR.  Groups  that  helped  to  avoid  outside  utilization,  or  that  moved  outside 
utilization  to  inside,  would  increase  their  PCR  and  their  share  of  the  savings.  This  seems  to  be 
an  acceptable  arrangement.  However,  reducing  inside  utilization  rates  (enhanced  internal 
efficiency)  would  increase  the  Medicare  Savings  but  decrease  the  PCR.  To  address  this,  HCFA 
could  place  a  floor  on  the  PCR,  for  example,  its  value  in  the  base  year.  Similarly,  HCFA  could 
use  the  group's  PCR  in  a  certain  year  (e.g.,  the  base  year  to  start)  in  the  reward  formula  for  a  few 
years  (e.g.,  three  to  five  years),  then  reevaluate  or  rebase  the  parameters  of  the  formula  using  an 
updated  value  of  the  PCR. 

If  the  policy  called  for  concentrated  penalties  for  a  group  that  exceeded  its  performance 
standard,  HCFA  could  be  take  a  similar  approach. 


^  A  hypothetical  physician  group  with  an  extremely  high  Patient  Capture  Ratio  would 
resemble  an  HMO.  Perhaps  HCFA  could  limit  the  share  paid  to  a  group  to  95  percent,  thus 
emulating  the  implied  savings  to  HCFA  under  risk  contracting. 


42 


Penalty  -  Medicare  Losses  x  Patient  Capture  Ratio  x  Sharing  Rate  ,  where 
Medicare  Losses  =  (RPUPS  y  -  Target'y)  ^  N  y , 

where  Y  is  any  year  a  group's  performance  is  evaluated, 

Target'  is  the  predicted  RPUPS  y,  adjusted  for  differences  in  the  provider's  case 
mix  between  the  base  year  and  the  performance  year,  and 

N  is  the  number  of  Medicare  beneficiaries  who  received  physician  services  from 
the  group  (i.e.,  the  denominator  in  RPUPS  y). 

Here  again,  HCFA  must  choose  values  for  those  variables  that  reflect  the  appropriate  incentives 
and  risks  for  participating  groups.  The  PCR  represents  a  gauge  on  what  proportion  of 
reimbursements  for  the  patient  population  went  to  the  group,  hence  its  direct  benefit  fi-om  the 
excessive  utilization.  For  this  reason,  we  believe  that  PCR  would  be  a  usefiil  component  of  the 
penalty  formula.  It  would  seem  reasonable  to  limit  penalties  through  a  fractional  Sharing  Rate 
since  groups  would  not  have  the  authority  over  utilization  that  comes  with  enrollment  and  "lock- 
in."'° 

It  may  be  reasonable  for  HCFA  to  specify  distinct  combinations  of  reward  and  penalty 
formulas.  For  example,  a  model  without  any  penalty  might  have  a  reward  formula  with  a  lower 
Sharing  Rate  than  a  model  with  a  penalty,  as  was  illustrated  in  Table  1 .  Similarly,  larger 
potential  rewards  could  be  provided  in  conjunction  with  larger  potential  penalties. 

In  addition  to  measuring  Medicare  savings  each  year,  HCFA  may  choose  to  evaluate 
Cumulative  Medicare  Savings  attributable  to  a  group's  performance.  In  that  context,  each  year 
the  group  will  make  a  positive  or  negative  increment  to  its  cumulative  savings.  Whether  a  group 
has  accumulated  a  surplus  or  a  deficit  may  affect  the  economic  consequences  of  Medicare 
Savings  in  any  given  year,  in  terms  of  rewards  or  penalties. 

D'.       Transaction  Mechanisms 

Under  MVPS,  HCFA  imposes  penalties  by  reducing  the  conversion  factors  (CF)  that 
determines  all  physicians'  fees.  This  is  administratively  simple  because  there  is  only  one 


'°It  would  be  appealing  to  set  targets  for  a  group's  own  Medicare  revenues,  for  example 
to  determine  whether  a  provider  benefited  from  excessive  overall  utilization.  Although  this  type 
of  question  may  be  worthwhile  in  the  context  of  an  evaluation,  it  may  be  difficult  to  project 
expected  reimbursement  rates  for  idiosyncratic  service  mixes.  This  is  discussed  further  in 
Appendix  C. 


43 


conversion  factor  per  category  of  services — surgical,  non-surgical  and  primary  care.  A 
disadvantage  is  that  penalties  are  deferred  two  years  into  the  fiiture. 

The  mechanism  of  adjusting  CFs  could  be  applied  to  GVPS,  at  least  for  physician  and 
supplier  services.  This  would  result  in  different  CFs  for  each  participating  group — many  more 
than  the  one  or  two  national  CFs,  but  not  nearly  as  many  distinct  prices  as  were  maintained  by 
carriers  under  the  usual,  customary,  and  reasonable  (UCR)  system  that  preceded  the  Medicare 
Fee  Schedule.  In  effect,  rewarding  providers  through  differential  conversion  factors  would 
distort  the  relative  values  across  services.  Furthermore,  beneficiaries  might  be  given  a 
disincentive  to  use  the  group  because  higher  CFs  presumably  would  lead  to  higher  copayments. 
Given  those  situations,  multiple  conversion  factors  may  turn  out  to  be  complicated  and 
undesirable. 

Alternatively,  a  reward  could  be  accomplished  through  a  lump  sum  payment  to  the 
physician  group.  After  the  end  of  a  successftil  year,  and  after  the  financial  calculations  could  be 
made,  the  physician  group  would  receive  a  single  payment  equal  to  the  value  of  the  reward. 
Disbursements  to  physicians  within  the  organization  would  be  an  internal  matter,  although  data 
from  HCFA  regarding  internal  and  external  utilization  perhaps  could  be  used  to  guide 
decision-making.  For  example,  the  group  could  analyze  the  causes  for  savings  (by  place  of 
service,  physician  specialty,  etc.). 

For  models  with  concentrated  penalties,  a  mechanism  for  achieving  those  transactions 
also  would  be  needed.  Using  conversion  factors  is  not  desirable,  as  discussed  above.  Because 
the  groups  presumably  are  ongoing  businesses  with  continued  involvement  in  treating  Medicare 
patients,  HCFA  could  administer  the  penalty  by  deducting  the  value  of  the  penalty  from  future 
payments  to  the  group.  For  example,  if  a  penalty  of  $50,000  is  owed  by  the  group,  payments  to 
the  group  in  the  following  year  would  be  reduced  by  that  amount.  This  would  be  a  simple 
deduction  and  would  not  affect  conversion  factors  or  relative  values  for  individual  services. 

In  addition  to  the  specific  transactions  with  the  groups,  there  may  be  other  economic 
consequences  siffecting  physicians  generally.  Decisions  about  sources  of  funding  for  rewards, 
and  the  amount  of  savings  kept  by  Medicare,  may  affect  the  conversion  factors  for  all  physicians. 
A  problem  could  arise  under  GVPS  if  it  is  necessary  to  know  what  would  have  happened  in 
terms  of  RPUPS  values  for  the  group  in  the  absence  of  GVPS.  In  the  reward  and  penalty 
formulas  discussed  above,  the  Medicare  Savings  (and  Losses)  were  defined  as  the  difference 
between  actual  and  expected  RPUPS.  Granted,  the  savings  may  be  real  and  even  attributable  to 
the  group,  but  some  of  those  savings  may  have  occurred  in  the  absence  of  GVPS.  On  the  other 
hand,  the  observed  market  rate  of  increase  may  have  been  an  underestimate  of  increases  that 
would  have  occurred  in  RPUPS  for  a  given  provider.  In  other  words,  GVPS  may  have  induced 
even  larger  savings  than  are  apparent. 

Rewards  to  groups  for  savings  that  would  have  occurred  anyway  can  be  justified  on 
equity  grounds — at  the  very  least  rewards  up  to  the  actuarial  value  of  national  fee  penalties. 


44 

Rewards  to  groups  for  savings  that  would  not  have  occurred  with  GVPS  are  appropriate 
incentive  payments.  However,  rewards  to  groups  for  savings  that  would  have  occurred  anyway, 
although  difficult  or  impossible  to  estimate,  Would  increase  Medicare  costs  relative  to  the 
program  without  GVPS.  Therefore,  HCFA  needs  to  consider  the  policy  with  respect  to  its 
implications  for  physicians  generally:  It  is  likely  the  conversion  factors  for  all  physicians  would 
need  to  be  reduced  by  some  amount  to  recoup  some  or  all  of  the  value  of  rewards  to  successful 
groups.  The  argument  may  apply  to  penalties  as  well:  Special  penalties  imposed  on  groups  for 
relatively  high  growth  rates  could  offset  a  portion  of  excess  payments  that  would  otherwise  be 
financed  by  broad-based  penalties. 

Whether  a  reward  is  for  equity  or  to  induce  efficiency,  HCFA  could  adjust  its  accounts 
under  MVPS  when  determining  the  national  conversion  factors.  The  adjustment  could: 

*■        Add  back  the  Medicare  Savings  amount  to  the  national  expenditure  totals.  This 
would  effectively  remove  the  successful  GVPS  groups  from  the  evaluation  of  national 
performance,  because  each  group  would  be  imputed  an  average  rate  of  increase.  Thus, 
HCFA  could  assess  the  collective  performance  of  the  remaining,  undifferentiated 
physician  population. 

*■        Add  back  just  the  amount  of  the  Rewards  to  the  national  expenditure  totals.  Under 
this  approach,  the  nation  would  still  get  some  credit  for  the  successful  performance  of 
groups.  However,  HCFA  would  finance  the  actual  rewards  through  lower  fees  to 
physicians  generally. 

Another  type  of  difficulty  arises  because  RPUPS  may  be  defined  in  terms  of  all  Medicare 
services,  not  just  physician  and  supplier  services.  For  Part  A  and  other  Part  B  savings,  HCFA 
needs  another  mechanism  to  finance  rewards  and  to  focus  penalties  more  on  the  inefficient 
providers.  Currently,  there  is  no  fi-amework  corresponding  to  MVPS  for  facility  and  other  non- 
MVPS  services.  The  analog  to  MVPS  fee  updates  would  be  PPS  updates,  or  allowable  cost 
increases  for  cost-reporting  facilities.  As  HCFA  currently  considers  many  factors  when  setting 
updates  for  these  costs,  the  reward  system  under  GVPS  could  become  another  relevant  factor  in 
those  determinations. 

E.       Possible  Implications 

The  concept  of  a  reward  is  introduced  in  GVPS  for  two  reasons.  First,  it  permits  a 
significant  reallignment  of  incentives  to  the  provider  that  is  more  akin  to  managed  care  than  fee- 
for-service.  Second,  it  allows  for  a  return  on  a  provider's  investments  in  managed  care  systems, 
which  might  be  more  costly  than  the  discounted  present  value  of  fiiture  fee  penalties,  but  very 
worthwhile  in  relation  to  potential  Medicare  cost  savings. 

Under  MVPS,  physicians  generally  will  be  subjected  to  penalties  to  the  extent  that 
national  Medicare  physician  expenditures  fail  to  meet  target  levels.  Physician  groups  operating 


45 


under  GVPS  that  improve  their  own  efficiency  also  reduce  total  Medicare  expenditiu-es. 
Resulting  decreases  in  volume  and/or  intensity  of  services  are  financially  beneficial  to 
Medicare — even  if  the  changes  are  not  sufficient  to  have  overall  group  performance  meet  target 
levels  under  GVPS. 

There  are  several  basic  objectives  we  set  out  to  meet  in  developing  GVPS  options, 
including  to  further  equity  and  efficiency  through  the  payment  system  and  to  assure  budget 
neutrality  for  Medicare.  If  HCFA  pays  physician  groups  under  GVPS  according  to  their 
estimated  savings,  other  physicians  are  likely  to  be  made  worse  off  for  reasons  that  are  consistent 
with  the  attractiveness  of  GVPS.  Specifically,  providers  that  show  lower  rates  of  increase  can  be 
better  off  through  GVPS.  At  the  same  time,  the  average  performance  of  remaining  physicians 
will  be  worse  because  the  more  efficient  providers  will  be  underepresented  in  the  remaining 
physician  pool. 

The  structure  of  incentives  under  GVPS  can  have  implications  for  the  degree  of  income 
transfer  among  physician  groups.  Larger  reward  payments  would  lead  to  lower  revenues  for 
other  providers.  Model  parameters,  such  as  the  definition  of  the  PGR,  can  affect  incentives  and 
economic  consequences  for  providers.  For  example,  HCFA  will  need  to  determine  the 
conditions  under  which  hospital  services  can  be  included  in  the  PGR.  Including  hospital  services 
within  the  PGR  for  a  physician  group  that  owns  a  hospital  may  bolster  greatly  the  incentives  to 
reduce  admission  rates.  However,  a  physician  group  that  does  not  own  a  hospital,  but  reduces 
admission  rates,  would  not  necessarily  be  adequately  rewarded.  HCFA  may  allow 
circumstances,  other  than  ownership,  in  which  the  PGR  would  include  hospital  and  other 
services.  Alternatively,  HCFA  could  adjust  the  Sharing  Rate  to  magnify  the  incentives  for 
efficiency." 

IX.      Eligibility  Criteria  for  GVPS 

A.       Linking  to  Purposes 

Deciding  upon  criteria  for  participation  under  GVPS  requires  consideration  of  other 
aspects  of  GVPS,  including  the  goals  of  the  system,  the  scope  of  services  involved,  and  the 
reward  and  penalty  structure. 

*■        Equity  in  payment.  GVPS  could  be  used  to  improve  equity  by  rewarding  efficient 

practices  and  focusing  penalties  on  inefficient  practices.  Assuming  the  more  equity  the 
better,  HCFA  could  aim  to  disaggregate  the  physician  populafion  as  much  as  is  feasible. 
Furthermore,  HCFA  may  wish  to  consider  mandatory  versions  of  GVPS  that  would 
further  sharpen  the  reward  and  penalty  structure  associated  with  Medicare  payments. 


"Values  for  the  Sharing  Rate  in  excess  of  1.0  would  tend  to  override  limitations  imposed 
by  the  PGR  in  circumstances  such  as  these. 


46 


►  Pervasive  incentives  for  efficiency.  In  general  we  could  expect  greater  total  savings  as 
incentives  for  efficiency  are  applied  more  universally.  With  more  providers  participating, 
greater  proportions  of  the  Medicare  population  would  come  into  utilization  measures  of 
groups  under  GVPS  and  the  aggregate  "patient  capture  ratio"  would  increase.  Aiming  for 
maximum  penetration  of  GVPS  might  involve  establishing  only  minimal  eligibility 
criteria.  HCFA  could  limit  criteria  to  those  required  for  validity  of  the  models. 

►  Broad-based  managed  care  initiatives.  Alternatively,  HCFA  could  use  GVPS 
explicitly  to  build  up  a  network  of  providers  that  have  the  organizational  capability  to 
manage  total  patient  care.  Providers  differ  in  their  ability  to  manage  care.  These 
differences  can  be  associated  with  a  number  of  organizational  and  experiential 
characteristics  that  HCFA  could  use  to  select  as  eligibility  criteria. 

HCFA  may  use  GVPS  as  a  step  toward  managed  care  and  preferred  provider 
arrangements.  Accordingly,  criteria  for  selecting  qualified  groups  may  be  more  substantial  right 
from  the  outset  of  GVPS.  These  could  include  assurances  of  clinical  quality  and  patient 
satisfaction,  for  example.  Furthermore,  if  financial  penalties  are  involved,  the  group  may  need  to 
demonstrate  adequate  financial  standing.  HCFA  already  has  developed  substantial  criteria  for 
monitoring  managed  care  organizations,  as  described  in  its  Contractor  Performance  Monitoring 
System. 

B.       Basic  Eligibility  Criteria 

There  are  certain  eligibility  criteria  that  may  be  necessary  for  the  utilization  measures  and 
performance  standards  to  be  valid  and  stable.  These  can  relate  to  characteristics  of  the  group 
itself,  or  to  aspects  of  the  patient  population  seen  by  the  group.  These  include: 

»■        Formal  definition  of  the  group.  We  have  referred  to  "groups"  participating  under 

GVPS,  and  to  integrated  health  care  delivery  systems.  Existing  physician  group  practices 
and  health  systems  may  be  willing  and  able  to  elect  separate  performance  standards. 

However,  there  may  be  other  arrangements  among  providers  that  come  about  in  order  to 
participate  under  GVPS.  For  example,  several  physician  groups  may  apply  to  operate 
under  a  separate  GVPS  that  is  based  on  their  combined  experiences.  HCFA  will  need  to 
formalize  agreements  between  separate  organizations  that  are  named  to  operate  together 
under  GVPS.  The  group  practices,  solo  physicians,  facilities,  and  other  providers  whose 
Medicare  Provider  ID  Numbers  are  to  be  included  in  the  definition  of  the  group  need  to 
formally  agree  to  this  arrangement.  Any  formal  relationships  will  have  to  be  clarified  and 
deemed  legally  acceptable.  For  example,  there  may  be  legal  restrictions  on  referring 
patients  for  services  when  the  referring  physician  has  ownership  interests. 


47 


>■        Specifications  for  internal  sharing  of  rewards  and  penalties.  In  addition,  the 

organization(s)  need  to  have  internal  arrangements  for  accepting  and  disbursing  lump 
sum  reward  payments  from  HCFA.  Similarly,  written  contracts  between  HCFA  and  the 
organization(s)  would  need  to  specify  methods  for  the  group  to  settle  penalty  situations. 
Even  if  HCFA  "receives"  the  penalty  payments  by  withholding  of  fiiture  reimbursements 
to  all  providers  in  the  group,  there  may  be  a  need  for  guidance  about  the  distribution  of 
those  withholdings. 

For  example,  a  GVPS  group  may  be  comprised  of  four  physician  group  practices. 
Penalties  (and  rewards)  may  be  distributed  in  proportion  to  their  Medicare  revenues  in  the 
performance  year.  However,  if  one  of  the  groups  gets  much  bigger  in  the  subsequent  year 
it  may  bear  a  disproportionate  burden  if  HCFA  withholds  reimbursements  from  all  the 
providers  until  the  penalty  is  paid. 

*■        Size.  There  are  likely  to  be  dimensions  of  size  on  which  HCFA  must  specify  a  minimum 
value  for  a  group  to  participate.  For  example,  HCFA  could  not  set  performance  standards 
for  a  solo  physician  who  sees  between  one  and  ten  Medicare  patients  per  year.  Average 
resource  consumption  for  the  patients  in  one  year  would  not  be  expected  to  form  a 
reliable  baseline  and  performance  standard  for  that  physician's  future  patients. 

That  example  illustrates  two  size  dimensions  that  are  likely  to  be  important  criteria  for 
eligibility:  the  number  of  Medicare  patients  seen  and  the  number  of  physicians  in  the 
group.  There  may  need  to  be  a  large  number  of  patients  included  in  the  measure  of 
average  resource  consumption  (i.e.,  RPUPS)  because  of  the  relatively  large  variance 
associated  with  reimbursement  amounts  at  the  individual  level.  There  may  need  to  be  a 
minimum  number  of  physicians  in  the  group  so  that  arrivals  and  departures  or  shifts  in 
clinical  emphasis  do  not  inordinately  affect  the  group's  case  mix. 

Size  may  be  important  for  a  somewhat  different  reason.  HCFA  could  decide  to  limit  the 
number  of  groups  operating  under  GVPS  for  administrative  reasons.  For  each  GVPS 
group,  HCFA  would  have  to  retrieve  relevant  data  elements  and  calculate  parameters 
siich  as  the  Medicare  Savings  and  the  Patient  Capture  Ratio.  Although  there  is  a 
correlation  between  the  size  of  the  group  and  the  number  of  data  elements,  it  may  be 
practical  to  limit  the  steps  to  larger  groups.  This  does  not  necessarily  preclude 
participation  by  any  provider,  but  implies  that  interested  providers  may  need  to  pool  their 
experiences  into  larger  groups  in  order  to  "make  the  cut." 

If  HCFA  limited  eligibility  criteria  to  these  basic  requirements,  an  enormous  variety  of 
provider  groups  may  be  eligible  to  participate.  This  is  desirable  to  the  extent  that  HCFA  would 
like  to  have  maximum  application  and  maximum  total  effect  of  GVPS.  In  addition,  the  basic 
criteria  could  allow  expensive  single  specialty  providers  to  participate,  even  those  without  a 


48 


primary  care  emphasis.'^  This  als5  may  be  desirable  since  large  portions  of  Medicare 
reimbursements  are  for  specialty  services,  the  providers  of  which  could  manage  their  own 
services.  Creating  incentives  for  a  wide  range  of  providers  to  manage  their  own  practices  could 
be  a  positive  result  of  GVPS. 

C.       Criteria  for  Managed  Care  and  Preferred  Provider  Initiatives 

A  different  tact  for  HCFA  could  be  to  identify  types  of  organizations  that  could  manage, 
or  even  provide,  a  full  range  of  services.  The  utilization  measures  and  performance  standards 
described  in  this  report  are  based  on  all  reimbursements  for  patients,  including  for  services  by 
other  providers.'-'  HCFA  may  undertake  a  definitive  assessment  of  a  group's  capacity  to  manage 
the  full  range  of  Medicare-covered  services.  This  may  require  several  layers  of  criteria. 

The  suggested  criteria  presented  below  are  based  on  the  assumption  that  a  very  large 
number  of  provider  groups  will  want  to  participate  in  the  program.  On  the  one  hand,  HCFA  may 
want  to  develop  fairly  restrictive  criteria  at  the  outset  so  as  to  best  assure  the  success  of  the 
program  and  to  provide  the  necessary  administrative  oversight.  On  the  other  hand,  Medicare 
may  not  be  best  served  by  requiring  groups  to  meet  stringent  selection  criteria  at  the  outset,  and 
thus  excluding  potentially  successful  groups  from  applying  for  GVPS.  In  this  situation,  criteria 
should  be  viewed  as  recommendations,  deviances  firom  which  could  be  justified  by  groups  and 
feasibility  for  participation  evaluated  by  HCFA. 

With  the  growth  of  managed  health  care  plans,  large  multispecialty  medical  groups  have 
had  to  compete  on  price  with  other  providers  for  contracts.  The  contracts  establish  the  prices  that 
the  plans  will  pay  for  provision  of  comprehensive  services,  and  the  requisite  assurances  about  the 
quality  of  the  services.  While  the  practices  are  given  varied  economic  incentives  (withholds, 
capitation  payments  or  bonuses)  to  operate  efficiently,  these  providers  are  selected  by  managed 
care  plans  based  on  relatively  standard  criteria  and  procedures.  HCFA  already  contracts  wdth 
HMOs  and  other  managed  care  organizations  and  has  determined  a  number  of  criteria  for 
assuring  quality  of  care.  These  principles,  and  perhaps  criteria  used  by  other  payers,  could  be 
adopted  by  HCfA  to  help  regulate  delivery  patterns  and  utilization  management  under  GVPS. 


The  more  specialized  or  abnormal  is  the  mix  of  services  in  a  group's  utilization 
measure,  the  more  necessary  it  may  be  for  HCFA  to  adjust  projected  growth  rates.  (See 
Appendix  C,  Section  G). 

We  gave  consideration  to  measuring  average  resource  consumption  based  on 
reimbursements  to  the  provider  only.  This  definition  was  rejected  for  three  reasons:  too  many 
threats  to  the  validity  of  performance  standards  (i.e.,  changes  in  a  provider's  specialty 
composition  or  scope  of  service);  the  difficulties  measuring  actual  savings  to  Medicare;  and  the 
willingness  of  providers  in  our  advisory  committee  to  understand  and  accept  models  with 
reimbursements  to  all  providers. 


49 


Even  though  groups  will  have  incentives  to  manage  the  services  used  by  their  Medicare 
patients,  GVPS  models  do  not  necessarily  require  beneficiaries  to  make  any  formal  commitments 
to  the  groups  as  their  patient  care  managers.  The  groups  may  be  expected  to  institute  procedures 
and  practices  that  enhance  consumer  satisfaction  and  loyalty  because  beneficiaries  can  change 
providers.  However,  an  argument  for  establishing  more  elaborate  eligibility  criteria,  and  for 
monitoring  patient  satisfaction,  etc.,  is  to  avoid  any  inappropriate  responses  to  the  economic 
incentives.  For  example,  a  provider  may  restrict  the  beneficiaries'  freedom-of-choice  to  utilize 
providers  outside  the  group  practice,  e.g.,  through  slow  referrals.  Therefore,  beneficiaries  using  a 
group  operating  under  GVPS  could  be  informed  of  the  special  arrangements  with  HCFA. 

►        Composition  of  the  group.  HCFA  may  wish  to  limit  the  groups  selected  to  those  with 
multiple  specialties  or  primary  care  gatekeepers.  Appropriate  scope  could  include 
primary  care  physicians,  general  surgeons,  internists,  and  specialists  in  such  areas  as 
cardiology,  oncology  and  neurology.  By  reducing  the  need  to  refer  patients  outside  their 
own  system,  such  groups  might  lose  a  smaller  proportion  of  their  capacity  to  efficiently 
manage  their  patients'  clinical  needs. 

In  addition  to  integrated  multispecialty  groups,  primary  care-oriented  physician  groups, 
such  as  family  practitioners  and/or  internists,  could  function  effectively  as  patient 
managers.  They  may  have  developed  patterns  of  referrals  to  specialists  whom  they 
expect  to  be  efficient.  They  may  eventually,  under  the  aegis  of  GVPS,  develop  more 
formal  alliances  with  preferred  providers  that  would  further  enhance  the  delivery  of  cost- 
effective  care. 

»-        Accessibility  standards.  Because  managing  care  can  require  swift  responses,  HCFA 
may  wish  to  assure  that  Medicare  beneficiaries  have  access  to  medical  care  in  the  group 
on  a  continuous  basis.  Accordingly  groups  could  be  required  to  demonstrate  that  triage 
systems  are  in  place  so  that  urgent  visits  (as  well  as  symptomatic  visits)  may  be 
scheduled  on  a  timely  basis.  Medicare  beneficiaries  should  be  able  to  count  on  24-hour 
access  to  the  group  practice  for  emergencies.  Groups  applying  to  participate  in  GVPS 
should  be  positioned  to  provide  appropriate  telephone  coverage  when  physician  offices 
are  closed. 

The  group  should  have  adequate  capacity  to  assume  responsibility  for  non-hospital 
physician  services.  It  would  be  most  preferable  if  the  group  practice  had  the  ability  either 
through  its  own  physicians  or  through  established  referral  mechanisms  to  provide  all 
physician  services  covered  in  the  performance  standard. 

*■        Quality  of  care  standards.  It  would  be  reasonable  for  HCFA  to  make  efforts  to  assure 
that  Medicare  beneficiaries  receive  appropriate  and  timely  care.  Groups  may  be  required 
to  have  an  on-going  quality  assurance  program  to  monitor  specific  clinical  and  non- 
clinical outcomes.  Another  desired  feature  would  be  a  system  to  measure  consumer 
satisfaction  and  complaints  about  services. 


50 


Other  management  systems  could  help  to  indicate  quality  of  care.  Groups  might  be 
required  to  have  systems  to  monitor  each  physician's  provision  of  care,  backed  up  with 
standards  for  educating  or  removing  physicians  that  do  not  perform  according  to 
established  guidelines.  It  may  be  considered  an  advantage  if  the  group  practice  had  in 
place  a  system  that  provides  for  a  uniform  medical  record  for  each  Medicare  patient  seen. 
Rigorous  credentialling  procedures  and  appropriate  board  certification  requirements  for 
the  group's  physicians  could  enhance  the  group's  ability  to  deliver  quality  care  and 
enhance  its  standing  as  a  GVPS  candidate. 

►  Patient  management  practices.  There  are  other  requirements  HCFA  may  consider  to 
assure  that  the  group  is  capable  of  providing  or  monitoring  care  for  all  Medicare-covered 
services  for  the  patients  it  sees.  It  is  recommended  that  the  group  be  able  to  demonstrate 
that  its  primary  care  providers  are  capable  of  serving  the  Medicare  beneficiaries  in 
multiple  sites  of  service,  such  as  offices,  hospitals,  nursing  homes  and  the  beneficiaries' 
homes.  For  example,  the  group's  ability  to  institute  and  monitor  the  use  of  home  health 
services,  post-acute  services  in  nursing  homes,  and  durable  medical  equipment  would  be 
considered  further  evidence  of  its  potential  to  succeed  under  GVPS. 

A  system  for  following  patients  upon  discharge  from  a  hospital  and  for  monitoring  the 
health  status  of  patients  who  are  at  a  higher  risk  of  hospitalization  or  judged  to  be 
medically  unstable  would  be  a  desirable  feature  in  terms  of  evaluating  the  group's  ability 
to  provide  high-quality,  efficient  care.  For  example,  groups  might  use  case  managers  to 
oversee  patients  with  specific  illnesses  over  an  extended  period  of  time.  Groups  may 
want  to  demonstrate  their  ability  to  institute  and  implement  treatment  protocols, 
especially  those  relevant  to  the  care  of  Medicare  beneficiaries. 

HCFA  could  require  a  baseline  indicator  of  patient  management,  such  as  a  group's 
involvement  with  evaluation  and  management  services  for  Medicare  beneficiaries.  This 
criterion  may  be  set  as  a  dollar  threshold,  which  would  also  help  to  limit  participation  to 
larger  groups.  For  example,  groups  may  be  required  to  have  provided  at  least  $100,000 
in  Medicare-covered  services  for  evaluation  and  management  services. 

HCFA  also  could  require  a  baseline  level  of  involvement  with  Medicare  patients  seen, 
such  as  a  minimum  Patient  Capture  Ratio  for  total  services,  physician  services,  or 
evaluation  and  management  services.  For  example,  participating  groups  may  be  limited 
to  those  with  at  least  a  20-percent  share  of  services  to  patients  seen. 

►  Data  and  information  systems.  Part  of  the  process  of  managing  care,  shaping  practice 
patterns,  and  achieving  economic  success  involves  the  timely  collection  and  analysis  of 
quality,  utilization  and  financial  data.  Under  GVPS  there  could  be  an  exchange  of  data 
between  a  group  and  HCFA,  in  order  to  track  utilization  and  report  performance  relative 
to  target  levels.  Important  types  of  information  to  process  could  include: 


51 


•  Utilization  rates  for  the  group's  Medicare  patients  in  comparison  to  patients  seen 
by  non-GVPS  providers,  including  visits,  tests,  procedures,  and  hospitalizations, 

•  Hospitalization  rates  by  diagnosis,  length  of  stay  and  number  of  physician  visits, 

•  Utilization  rates  by  physician  and  other  providers, 

•  Referral  rates  to  other  group  physicians  and  to  outside  practices, 

•  Revenues  and  expenses  by  type  of  service, 

•  Mortality  or  hospitalization  rates  for  selected  diseases, 

•  Utilization  rates  for  selective  preventive  services  (e.g.,  screening  mammography 
and  flu  shots),  and 

•  Descriptive  reports  on  all  patient  satisfaction  surveys  done  and  details  on  waiting 
times  to  be  seen  for  different  type  of  visits  (symptomatic,  non-symptomatic, 
urgent,  etc.). 

The  nature  and  extent  of  Medicare  information  that  is  shared  with  groups  needs  to  be 
determined  in  light  of  any  legal  or  ethical  issues.  Specific  boundaries  will  be  needed 
regarding  how  much  detail  is  useful  or  permissible.  For  example,  exchanging  extremely 
specific  information,  such  as  utilization  patterns  for  specific  beneficiaries  or  specific 
competing  providers,  may  not  be  desirable  or  even  administratively  practical. 

X.       Provider  Responses  to  GVPS 

Making  available  a  GVPS  option  will  lead  physician  groups  to  consider  many  decisions, 
including  possible  strategic  responses.  GVPS  could  give  groups  the  incentive  to  manage  their 
patients'  care  more  efficiently.  The  strategies  that  physician  groups  use  to  achieve  efficiencies 
are  likely  to  be  influenced  by  a  multitude  of  factors,  including  characteristics  of  the  organization 
and  the  market  environments.  The  following  section  describes  potential  provider  responses  to 
GVPS,  including: 

Deciding  whether  to  elect  GVPS, 

►  Developing  an  action  plan,  and. 

►  Managing  performance 


52 


A.       Deciding  Whether  to  Elect  GVPS 

The  reward  and  penalty  options  implemented  by  HCFA  under  GVPS  would  influence  a 
group's  decision  whether  or  not  to  participate.  If  there  are  potential  rewards  and  relatively  little 
risk  involved,  most  or  all  groups  may  desire  to  participate.  Under  those  circumstances,  HCFA 
would  probably  need  to  specify  clear  eligibility  criteria  for  participation  in  order  to  obtain  a 
manageable  number  of  candidates.  However,  options  that  could  impose  financial  penalties  on 
groups  that  failed  to  meet  performance  standards  may  cause  a  substantial  proportion  of  groups  to 
decide  not  to  participate.  If  participation  requires  concrete  actions  on  the  part  of  participants, 
such  as  investing  in  managed  care  systems,  then  groups  may  have  to  weigh  the  prospects  of 
success  against  the  expected  costs  of  those  actions. 

1 .       Meeting  Eligibility  Criteria 

There  are  two  levels  of  eligibility  criteria  suggested  for  groups  willing  to  participate  in 
GVPS  (see  Section  IX).  One  level  relates  to  administration  and  general  feasibihty,  and  second 
level  relates  to  apparent  ability  to  manage  care.  To  meet  one  or  the  other  set  of  criteria,  some 
groups  may  need  to  combine  their  efforts.  For  example,  individual  physician  practices  could 
pool  their  experiences  to  meet  criteria  related  to  size  or  scope.  Similarly,  physician  organizations 
such  as  local  or  specialty  associations  may  sponsor  an  arrangement  by  which  physician  practices 
could  combine  their  efforts. 

Even  beyond  minimum  thresholds  of  size  for  adequate  stability  of  measures,  larger 
organizations  may  be  in  a  better  position  to  make  capital  investments  in  managed  care  structures 
and  personnel.  Small  groups  could  be  less  able  to  absorb  the  costs  of  managerial  and 
administrative  support  and  the  increased  start-up  capital  expenditures  for  new  cost-saving 
technologies.  Furthermore,  in  order  to  manage  patients  effectively  and  efficiently,  groups  may 
find  it  necessary  to  be  in  direct  control  of  the  resources  needed  to  provide  a  wide  spectrum  of 
services.  In  this  way,  they  would  benefit  from  economies  of  scope.  For  example, 
interdepartmental  linkages  would  facilitate  the  efficient  triage  of  patients  to  appropriate  service 
facilities  and  services.  It  is  expected  that  groups  opting  for  GVPS  would  have  an  incentive  to 
expand  the  scope  of  their  services  through  formal  or  informal  mechanisms  in  order  to  provide  a 
wider  range  of  services  within  their  own  system. 

Another  important  indicator  of  a  group's  market  position  is  its  Patient  Capture  Ratio 
(PCR),  which  is  the  percentage  of  services  (measured  in  dollars)  provided  to  these  patients 
directly  by  the  group  itself  For  a  given  level  of  RPUPS,  a  higher  capture  ratio  means  the  group 
is  collecting  a  larger  proportion  of  dollars,  and  suggests  that  the  group  is  better  able  to  control 
more  of  the  patients'  services. 


53 


2.  Service  Categories  for  RPUPS 

Groups  may  have  the  option  of  electing  GVPS  for  MVPS  services  only,  or  for  all 
Medicare  services.  Reimbursement  amounts,  potential  savings,  and  therefore  potential  rewards 
are  larger  for  all  Medicare  services.  All-inclusive  performance  standards  may  be  appropriate  for 
large  groups  with  integrated  delivery  systems.  Performance  standards  based  only  on  MVPS 
services  may  be  preferred  by  some  smaller  or  less  integrated  organizations.  However,  the 
definition  of  services  included  in  the  PGR  could  affect  the  attractiveness  of  GVPS  depending  on 
the  scope  of  services.  For  example,  if  the  physician  group  was  part  of  an  organization  that 
owned  a  hospital,  including  hospital  services  in  the  PGR  could  create  financial  incentives  to  limit 
facility  costs  through  lower  admission  rates. 

3.  Reward  and  Penalty  Structure 

Financial  incentives  provide  a  powerful  rationale  for  groups  to  expedite  the  adoption  and 
incorporation  of  methods  for  providing  more  efficient  care.  The  more  that  groups  can  anticipate 
receiving  direct  financial  rewards,  the  more  they  may  be  expected  to  invest  in  innovative 
strategies  to  be  more  cost-effective.  In  addition,  provider  response  to  the  reward  and/or  penalty 
structure  also  might  be  influenced  by  the  potential  size  of  the  penalties.  Some  groups  may 
choose  to  assume  the  risk  of  a  penalty  if  the  potential  for  reward  would  be  even  greater. 

B.       Action  Plan 

Depending  on  the  eligibility  criteria,  groups  participating  in  GVPS  already  may  be  at  or 
near  the  cutting  edge  in  terms  of  having  the  infi-astructure  and  managerial  expertise  to  plan  for 
and  deliver  efficient  care.  However,  under  GVPS,  they  might  re-consider  their  current  situation 
and  recognize  potential  opportunities  for  making  further  gains  in  cost-effectiveness  and/or 
market  share.  This  section  discusses  some  of  the  actions  a  group  may  plan  to  undertake  under 
GVPS. 

Using  average  utilization  and  patient  capture  ratio  as  two  dimensions  describing  groups 
in  the  Medicare  market,  a  group  can  be  classified  according  to  the  following  matrix: 


MEAN  RPUPS  DOLLAR  VALUE 

PATIENT 

CAPTURE 

RATIO 

low 

high 

high 

A 

B 

low 

D 

C 

54 


The  PCR  reflects  the  group's  degree  of  involvement  or  control  over  services  and 
expenditiu-es.  Average  reimbursement  rates  reflect  two  factors:  the  relative  health  status  or  need 
of  the  patients,  and  the  degree  of  efficiency  in  service  delivery.  A  group's  location  in  this  matrix 
at  the  start  of  participation  under  GVPS  may  affect  its  priority  objectives  and  its  strategies.  For 
example,  a  group  with  a  low  capture  ratio  could  take  steps  to  raise  the  percentage  of  Medicare 
reimbursement  dollars  going  to  the  group  itself  An  overall  strategy  may  involve  intra- 
organizational  and  inter-organizational  measures  in  both  managerial  and  clinical  areas.  At  the 
clinical  level,  groups  may  embark  on  strategies  to  change  their  product  mix  in  response  to  market 
demand,  modify  scheduling  to  accommodate  the  needs  of  its  patients,  and  change  staff 
specialization  patterns.  Groups  may  embark  on  more  joint  ventures  and  plaiming  in  which  they 
will  share  both  production  facilities  and  support  staff. 

Breaking  down  the  PCR  into  different  categories  can  fiimish  additional  useful 
information  regarding  utilization  for  groups.  For  example.  Figure  1 1  shows  the  percentage  of 
patients  categorized  in  deciles  of  within-group  utilization  for  a  Group  X,  a  Type  B  organization 
(high  PCR,  high  RPUPS).  Note  that  utilization  refers  to  physician  and  supplier  services  only. 
This  group's  overall  PCR  was  69.1  percent.  Over  one-third  of  patients  had  all  of  their  utilization 
within  the  group,  and  another  14.5  percent  had  more  than  90  percent  of  their  utilization  within 
the  group.  Fully  two-thirds  of  all  beneficiaries  ever  seen  at  Group  X  had  more  than  70  percent  of 
their  utilization  within  the  group.  This  information  can  be  analyzed  in  conjunction  with  the 
v^thin-group  reimbursements  and  RPUPS  for  each  category  of  patient.  For  example,  Figure  1 2 
shows  the  distribution  of  within-group  reimbursements  (darker,  lower  line)  and  RPUPS  (upper 
line).  Putting  the  two  graphs  together,  we  may  infer  that  Group  X  provides  a  large  amoimt  of 
tertiary  care.  As  described  above,  such  a  group's  strategies  include  prioritizing  alliances  with 
primary  care  providers  and  vigorously  pursuing  internal  measures  to  improve  managerial  and 
clinical  efficiency. 

Group  Y's  PCR  and  RPUPS  show  patterns  of  a  Type  D  organization,  (Figures  13  and 
14).  It's  overall  PCR  is  21 .9  percent.  The  vast  majority  (86.3%)  of  beneficiaries  receive  70 
percent  or  more  of  their  care  elsewhere.  Viewing  this  information  in  conjunction  with  within- 
group  reimbursements  and  RPUPS,  we  may  infer  that  Group  Y  is  essentially  a  provider  of 
primary  care  for  patients  who  in  general  appear  to  need  less  services  than  patients  seen  by  Group 
X.  As  described  above,  such  a  group  may  undertake  to  improve  informal  or  formal  affiliations 
with  providers  of  tertiary  care,  in  order  to  better  manage  their  patients'  utilization  that  currently 
occurs  outside  their  system. 

If  the  PCR  is  used  in  the  reward  structure,  groups  would  have  an  incentive  to  manage 
more  of  the  patient's  care  in  order  to  benefit  from  the  comparative  efficiency  of  their  system,  and 
to  increase  their  share  of  the  reward.  There  could  be  similar  incentives  to  see  more  patients, 
since  this  could  increase  net  income  and  provide  a  larger  base  for  generating  savings  and 
rewards.  However,  seeing  more  patients  could,  at  least  at  first,  tend  to  lower  the  average  capture 
ratio  because  new  patients  might  tend  to  ease  into  the  practice  over  time.  It  is  expected  that 
groups  will  implement  additional  strategies  to  increase  market  share  and  reduce  costs  both  within 
and  outside  their  system. 


to 


Figure  11 

GROUP  X 


Annual  Within  Group  Utilization  of  Part  B  Services  (in  Dollars), 

Medicare  Patients 


Percent  of 
Within 
Group 
Utilization 


100- 
91  -  99 

81  -  go- 
yi  -  80  - 

61-70- 
51  -  60  - 
41-50- 
31  -  40 
21  -  30 
11-20 
1  -  10 


■;:;gi;i;;?';i:l>;::|V 

;,;|iip;v'il;-;iif.: 

13";;,;, '-i. ,;,  v/.. 

677}- 


5A\ 


4.4J- 


3^8J 
3>J 


41 


5 


8.8j 


10 


14.5)- 


15  20  25  30 

Percent  of  Patients 


SOURCE:  Analysis  of  1992  National  Claims  History  Data  by  Institute  for  Health  Policy,  Brandeis  University 


35  40 

Pt.  Capture 
Ratio:  69.1% 


Figure  12 


GROUP X 

m 

Mean  Annual  Group  and  Total  Utilization  of  Part  B  Semces  (in  Dollars), 

Medicare  Patients 


Mean 
Dollars 


Patient  Categories  by  Percent  of  Within  Group  Utilization 

^  J  ^  Pt.  Capture 

Ratio:  69.1% 

SOURCE:  Analysis  of  1992  National  Claims  History  Data  by  Institute  for  Health  Policy ,  Brandcis  University 


Figure  13 


GROUP Y 

Annual  Within  Group  Utilization  of  Part  B  Services  (in  Dollars). 

Medicare  Patients 


Percent  of 
Within 
Group 
Utilization 


100 
91  -  99  H 
81  -  90 
71  -  80 
61  -  70  H 
51  -  60 
41  -  50 
31  -  40  - 
21  -  so- 
il -  20 
1-10- 


1J> 


2.8 


5.9] 


379} 


6.1 


879} 


1 1 .6] 


16.1 


5 


10  15  20  25 

Percent  of  Patients 


SOURCE:  Analysis  of  1992  National  Claims  History  Data  by  Institute  for  Health  Policy,  Brandeis  University 


31.7 


30  35 

Pt.  Capture 
Ratio:  21.9% 


Figure  14 


GROUP  Y 


00 


Mean  Annual  Group  and  Total  Utilization  of  Part  B  Services  (in  Dollars), 

Medicare  Patients 


1600 


Mean 

Dollars  .^o^i- 


1200 


1000 


BOO 


600 


400- 


200 


1  -  10 


1 1  -  20  21  -30  31  -  40  41  -50  51  -  60  61  -  70  71  -  80  81  -  90  91  -  99 


100 


Patient  Categories  by  Percent  of  Within  Group  Utilization  q^^^^^^ 

Ratio:  21.9% 

SOURCE:  Analysis  of  1992  National  Claims  History  Data  by  Institute  for  Health  Policy ,  Brandeis  University 


59 


1 .       Increasing  Market  Share 

No  health  care  organization  is  impervious  to  the  external  environment  in  the  current 
climate  of  cost-control.  Under  GVPS,  groups  are  expected  to  vigorously  study,  explore,  and 
analyze  their  current  position  in  the  marketplace,  and  formulate  strategies  according  to  their 
identified  strengths,  weaknesses,  opportunities,  and  challenges.  One  goal  could  be  to  increase 
'  market  share  among  the  Medicare  population. 

The  major  strategy  that  groups  use  may  be  to  market  themselves  in  terms  of  cost,  quality, 
and  comprehensiveness  of  services.  The  strategy  may  be  one  of  expansion  in  order  to  provide 
patients  with  a  complete  palette  of  services  and  to  have  more  clout  with  purchasers  of  health 
care.  They  may  engage  actively  in  constructing  strategic  alliances  with  other  providers  of  health 
care  in  order  to  provide  a  completely  integrated  continuum  of  care  to  patients. 

With  such  a  strategy,  integration  is  expected  to  take  place  horizontally  as  well  as 
vertically,  including  across  disciplines.  Groups  may  concentrate  on  acquiring  or  allying 
themselves  with  primary  care  providers  and  creating  a  network  of  referring  physicians.  They 
may  follow  a  strategy  of  mergers  and  acquisitions  of  previously  free-standing  facilities  and 
service  organizations,  such  as  nursing  homes,  skilled  nursing  facilities,  rehabilitation  services, 
mental  health  and  substance  abuse  treatment  facilities,  laboratories,  visiting  nurse  organizations, 
ambulance  services,  pharmacies,  and  suppliers  of  durable  medical  equipment. 

The  market  strategies  that  groups  prioritize  or  pursue  more  vigorously  may  be  expected 
to  be  a  function  of  both  their  RPUPS  and  PGR.  According  to  our  typology,  a  Type  A  group 
could  resemble  an  HMO  because  of  efficient  practices  and/or  relatively  healthy  patient 
populations.  They  may  be  expected  to  focus  on  increasing  their  patient  base,  perhaps  actively 
marketing  themselves  as  high  quality  and  efficient  providers.  Type  B  groups  may  also  attempt  to 
increase  their  patient  base,  perhaps  by  actively  pursuing  mergers  with  primary  care  providers  and 
building  a  strong  primary  care  referral  base. 

Type  C  groups,  with  high  RPUPS  and  low  PGR,  may  be  of  two  types:  those  with  and 
those  without  a  capacity  to  provide  the  necessary  services  to  a  patient  population  with  significant 
and  diverse  health  care  needs.  Those  with  the  capacity  could  market  their  existing  services  to 
their  patients,  and  make  it  attractive  for  these  patients  to  remain  within  the  system.  On  the  other 
hand,  those  groups  with  patients  leaving  the  system  due  to  inadequate  capacity  or  services  will 
need  to  make  strategic  decisions  regarding  expanding  versus  strategic  alliances.  It  might  be  most 
beneficial  for  such  groups  to  affiliate  with  providers  of  tertiary  care,  who  in  turn  would  be 
looking  for  a  dependable  base  of  patient  referrals.  Finally,  Type  D  groups  have  patient 
populations  with  low  overall  utilization  rates  as  well  as  low  participation  within  the  groups. 
These  groups  have  an  opportunity  to  explore  adding  new  patient  populations  to  their  group,  and 
expanding  the  scope  of  their  services  accordingly. 


60 


2.       Managing  Cost  and  Utilization 

a.       Within  the  Organization 

Many  health  care  providers  are  competing  on  the  basis  of  cost.  Reductions  in  cost  often 
are  achieved  within  the  organization  responsible  for  providing  health  care.  Physicians  gain 
patients  by  discounting  fees,  organizations  receive  volume  discounts  from  pharmaceutical  firms, 
and  so  on,  but  beyond  a  point,  cutting  costs  may  affect  quality  and  some  say  explicit  rationing 
may  be  imposed.  In  order  to  counter  such  accusations,  groups  will  need  to  employ  tandem 
approaches  to  cutting  costs  and  ensuring  quality.  Organizations  will  compete  and  differentiate 
based  on  quality,  and  not  simply  on  cost.  This  involves  such  criteria  as  better  access  for  patients, 
better  process  and  outcomes,  and  increased  customer  satisfaction. 

An  important  component  of  reducing  costs  within  the  system  is  utilization  review. 
Upgrading  information  systems  in  order  to  track  concurrent  rather  than  historical  financial  and 
clinical  data  is  expected  to  become  common  practice.  It  is  also  expected  that  groups  will 
upgrade  their  risk  management  and  malpractice  avoidance  strategies.  As  with  other  health  care 
providers,  groups  have  several  important  reasons  for  ensuring  the  completeness  and  accessibility 
of  their  patient  medical  records.  This  may  be  more  of  a  problem  with  group  practices  which 
have  multiple  sites  where  care  may  be  delivered  to  the  same  patient.  Groups  therefore  will  have 
more  incentives  to  create  a  single,  composite  electronic  medical  record  made  up  of  data  drawn 
from  all  sites.  Groups  may  build  systems  to  construct  lifetime  clinical  records,  which  in  turn 
would  lead  to  improved  efficiency  in  managing  patients  seen  at  their  facilities.  In  addition, 
groups  may  build  an  infrastructure  in  which  patient  referral  and  triage  to  specialists  and  other 
needed  services  is  expedited  and  ensured.  They  could  formalize  on-call  scheduling  so  that  no 
needed  specialty  or  service  is  ever  unavailable,  and  no  urgently  required  service  goes  unattended 
due  to  a  lack  of  adequate  and  appropriate  staffing.  Groups  are  likely  to  develop  and  use  group- 
specific  standards  of  care,  which  can  have  legal  standing  and  are  therefore  protective. 

It  may  be  that  health  maintenance  and  preventive  activities  will  play  a  larger  role  as 
organizations  seek  to  control  costs  within  their  system.  A  problem  is  that  beneficiaries  are  not 
committed  to  staying  with  the  group.'"  The  payoff  in  terms  of  reduced  costs  for  health 
maintenance  and  preventive  activities  is  in  the  future,  and  therefore  may  not  be  recognized 
through  lower  RPUPS  for  that  group.  Patient  loyalty  is  a  factor  that  might  counter  this  trend.  By 
enhancing  contact  through  health  maintenance  and  preventive  activities,  groups  may  encourage 
patient  loyalty.  Patient  outreach  for  education  or  follow-up  may  have  the  same  beneficial  effect 
of  encouraging  patient  loyalty  to  the  group. 


'"Because  Medicare  beneficiaries  can  disenroll  from  TEFRA  HMOs  at  any  time,  they  are 
not  committed  to  staying  with  a  provider  in  that  context  either. 


b.       Outside  the  Organization 


61 


A  significant  challenge  faced  by  physician  groups  will  be  to  control  costs  outside  their 
system.  A  certain  segment  of  the  patient  population  would  be  expected  to  travel,  and  in  enrolled 
situations,  organizations  are  able  to  control  costs  incurred  outside  their  system  by  various 
mechanisms  such  as  pre-admission  certification,  payment  only  for  emergency  care,  and  co- 
payments  or  deductibles  for  utilization  other  than  at  preferred  sites.''  In  non-enrolled  situations 
such  as  those  faced  by  physician  groups  under  GVPS,  these  approaches  may  not  be  appropriate 
or  feasible.  However,  we  are  exploring  the  possibility  of  allowing  groups  to  embellish  the 
services  available  to  Medicare  beneficiaries  (e.g.,  through  discounted  pharmaceuticals)  that  may 
function  like  coverage  limits  to  foster  loyalty.  Presumably,  groups  could  finance  the  extended 
benefits  through  expected  (or  past)  reward  payments. 

At  the  individual  patient  level,  groups  will  need  to  find  ways  of  educating  patients  about 
treatment  options  outside  the  system  in  order  that  they  may  make  informed  decisions.  For 
example,  patients  seeking  procedures  elsewhere  could  be  given  decision  support.  Patients  who 
inform  their  providers  within  the  system  that  they  intend  to  travel  could  be  supplied  with  travel 
advisory  packets  that  include  education  about  compliance  with  medications  and  sources  of 
preferred  care.  A  more  global  strategy  would  involve  authorities  outside  the  group,  such  as 
HCFA,  that  could  profile  providers  in  the  area  for  appropriateness  and  efficiency  of  care,  so  that 
all  providers  in  a  market  area  could  be  held  to  a  single  standard  of  care.  For  example, 
gastrointestinal  endoscopy  and  cardiac  catheterization  are  two  frequently  mentioned  procedures 
for  which  patients  may  leave  the  system  in  questionable  cases.  Providers  of  these  services 
outside  the  system  could  be  profiled  and  feedback  supplied  if  utilization  were  higher  than 
expected  for  that  patient  population. 

Again,  where  groups  fit  in  the  typology  may  influence  the  strategies  they  find  most 
useful.  Types  A  and  B  groups  do  not  need  to  prioritize  control  outside  their  organization,  since 
they  already  control  a  large  proportion  of  their  patients'  utilization.  Type  C  organizations  may 
find  themselves  in  the  most  vulnerable  position  of  all,  as  they  manage  a  group  of  patients  who 
have  high  utilization  that  is  incurred  mostly  outside  the  system.  These  groups  may  need  to 
pursue  most  actively  a  strategy  of  strategic  alliances  with  other  providers  of  care  for  their 
patients,  and  include  contractual  arrangements  for  aligning  incentives  among  themselves. 
Although  the  stakes  are  lower  for  Type  D  organizations  because  of  their  patients'  low  RPUPS, 
they  too  may  be  served  best  by  encouraging  affiliations  and  mergers  with  other  area  providers. 

Questions  that  all  organizations  face  as  they  attempt  to  control  costs  outside  their  system 
will  include  the  best  affiliations  that  they  may  make.  For  example,  if  such  arrangements  do  not 


''From  the  beneficiary  perspective,  an  advantage  of  GVPS  is  that  traveling  and  seasonal 
migration  do  not  interfere  with  supplemental  insurance  benefits.  HMOs  may  prohibit 
membership  if  a  beneficiary  is  out  of  the  service  area  for  extended  periods. 


62 


already  exist,  should  they  seek  to  affiliate  with  hospitals,  primary  care  physician  groups, 
specialty  groups,  and/or  other  types  of  providers?  How  formal  should  these  arrangements  be? 
What  incentives  should  be  shared,  and  what  are  the  legal  issues  involved,  especially  surrounding 
anti-trust  and  restriction  of  trade?  How  can  physician  leaders  safeguard  against  threats  to  quality 
that  may  occur  in  the  pursuit  of  cost  control?  Finally,  how  can  groups  best  manage  the  risk 
associated  with  having  finite  control  over  utilization  outside  their  system?  Groups  may  be 
served  best  by  encouraging  and  facilitating  utilization  within  their  own  system  of  preferred 
providers. 

3.       Care  Management  Strategies 

Health  care  organizations  have  traditionally  held  a  service  concept  that  advocates  practice 
management.  Many  of  them  have  sophisticated  systems  for  managing  the  resources  necessary  to 
run  their  practices  and  controlling  practice  costs.  Needing  to  manage  the  entire  patient  in  order 
to  compete  reflects  relatively  recent  changes  in  the  marketplace.  Similar  incentives  would  exist 
and  be  extended  under  GVPS. 

Some  groups  may  utilize  the  gatekeeping  concept  in  order  to  manage  (but  not  necessarily 
restrict)  patient  access  to  specialty  care.  Assigning  patients  to  a  primary  care  provider  could 
enhance  patient  loyalty  as  well.  In  certain  cases,  specialists  can  serve  as  gatekeepers  to  provide 
care  that  is  more  effective  and  efficient.  Commonly  cited  conditions  include  end  stage  renal 
disease,  diabetes,  ulcerative  colitis,  and  several  cardiac  and  pulmonary  conditions.  Therefore, 
some  groups  may  be  expected  to  enhance  specialist  referral  and  consultation  within  their 
organizations,  and  develop  efficient  triaging  systems. 

Under  GVPS,  groups  will  have  an  incentive  to  provide  services  in  the  most  cost-effective 
way  possible,  and  their  recruitment  and  staffing  mix  is  expected  to  reflect  this.  The  appropriate 
use  of  physician  substitutes  has  long  been  recognized  as  a  legitimate  method  for  reducing  costs 
and  improving  patient  satisfaction.  GVPS  groups  also  may  expand  the  role  of  non-physician 
providers  in  reducing  costs  and  fostering  quality.  For  example,  groups  may  use  pharmacists  to 
educate  patients,  fostering  patient  compliance  (especially  for  chronic  conditions  such  as  asthma, 
degenerative  joint  disease,  pain  management,  and  diabetes),  and  thus  reducing  long-term  costs 
associated  with  non-compliance. 

Groups  may  analyze  the  full  range  of  health  care  needs  of  their  patient  population,  and 
explore  ways  to  fulfill  these  needs.  Groups  will  need  to  consider  "make  or  buy"  decisions,  i.e., 
whether  to  provide  additional  services  internally,  or  rely  on  external  providers.  The  volume  of 
patients  needing  a  particular  service  likely  will  affect  which  strategy  an  organization  follows. 


63 


C.       Managing  Performance 

1 .       Management  Control 

Under  GVPS,  groups  will  have  a  greater  incentive  to  manage  the  behaviors  of  individual 
providers  and  patients.  Groups  may  enhance  systems  of  bureaucratic  control,  such  as  protocols 
and  guidelines,  peer  review,  monitoring,  training  and  education,  and  utilization  review.  Internal 
"market"  controls  also  may  be  intensified,  such  as  linking  rewards  and  penalties  to  productivity 
and  performance.  Some  groups  may  inculcate  a  form  of  control  through  group  membership  and 
its  implications  of  living  up  to  a  certain  professional  and  personal  standard,  adhering  to  a  certain 
philosophy  of  care,  and  acting  responsively  to  the  mandates  of  organizational  leadership.  Some 
specific  examples  of  how  control  may  be  exerted  follow. 

a.  Practice  Guidelines 

Examples  of  clinical  bureaucratic  control  systems  are  clinical  guidelines,  clinical 
pathways,  standards  of  care,  and  practice  protocols.  Many  already  exist  and  are  continually 
being  refined  as  physicians  and  nurses  gain  knowledge  fi^om  recording  their  own  experiences, 
observing  and  consulting  with  colleagues,  and  studying  recent  advances.  However,  there  is  often 
considerable  variation  among  individual  providers,  and  even  from  site  to  site.  In  order  to  achieve 
efficiencies,  some  organizations  may  develop,  customize,  and  disseminate  clinical  guidelines  on 
a  continual  basis.  Groups  may  direct  some  clinical  guidelines  mainly  at  physicians.  However,  a 
solid  organizational,  cross-functional  infrastructure  is  vital  to  the  successful  implementation  of 
many  types  of  interventions.  The  nursing  profession  has  provided  leadership  in  this  area  for 
many  years. 

b.  Feedback  Mechanisms 

Many  existing  groups  have  feedback  mechanisms  so  that  physicians  can  evaluate  their 
performance,  both  in  absolute  terms  and  relative  to  others.  Currently,  the  nature  of  routine 
feedback  to  physicians  varies  widely.  The  trend  is  to  provide  utilization  data,  usually  to  the 
department  head,  who  then  shares  it  with  individual  physicians  in  the  department.  For  example, 
physicians  may  receive  information  about  the  number  of  patients  and  case  mix,  number  and 
types  of  procedures,  average  lengths  of  stay,  and  ancillary  usage.  Groups  will  need  to  provide 
accurate  and  up-to-date  data  to  physicians  on  clinical,  as  well  as  financial,  aspects  of  patient  care. 


64 


c.       Compensation  Systems 

Physician  compensation  systems  can  be  based  on  fees  generated  or  a  simple  salary,  with 
either  mode  linked  to  productivity,  patient  satisfaction,  and  other  items  such  as  teaching, 
research,  and  administrative  responsibilities.  Often  the  method  of  compensation  reflects  the 
culture  and  values  of  the  organization,  and  changing  the  system  can  cause  internal  conflicts. 
Organizations  that  adjust  compensation  according  to  productivity  have  had  difficulty  when 
payers  create  opposing  incentives.  GVPS  would  align  incentives  under  Medicare  with  incentives 
from  other  managed  care  payers. 

2.       Evaluating  Performance 

a.  RPUPS 

The  primary  financial  goal  and  performance  measure  under  GVPS  is  meeting  the  target 
rate  of  increase  in  RPUPS.  Unfortunately,  precise  measurement  of  performance  will  occur  after 
the  close  of  each  performance  year.  However,  GVPS  is  intended  to  evoke  long-run  changes  in 
health  care  delivery  patterns.  Many  of  the  management  strategies  required  for  success  under 
GVPS  are  capital  and  systemic  investments.  Presumably,  most  existing  organizations  will  have 
arrangements  with  many  other  payers  that  permit  rapid  assessment  of  short  run  as  well  as  long 
run  benefits.  On  the  other  hand,  groups  may  find  it  helpftal  to  monitor  their  own  practices,  such 
as  revenues  per  patient  seen,  to  track  performance  periodically  during  the  performance  year.  In 
addition,  they  can  survey  patients  regarding  utilization  of  other  providers,  perhaps  in  conjunction 
with  patient  satisfaction  surveys. 

An  important  and  unresolved  issue  for  GVPS  is  the  nature  and  extent  of  data  sharing 
between  HCFA  and  the  groups.  Even  the  minimum  administrative  requirements  for  HCFA  are 
substantial,  and  adding  frequent  data  reports  could  add  a  considerable  extra  burden.  If  groups 
are  given  information  about  market  level  trends  in  reimbursement  rates,  they  can  benefit  from 
making  comparisons  to  their  own  performance,  especially  if  they  also  are  able  to  analyze 
differential  trends  by  type  and  place  of  service. 

b.  Patient  Capture  Ratio 

Another  critical  success  factor  for  groups  could  be  the  PCR.  There  are  at  least  three 
possible  reasons  for  a  group  to  strive  for  higher  PCRs  over  time.  First,  increasing  the  services 
provided  in-house  to  the  existing  patient  base  translates  into  higher  fee-for-service  revenues. 
Second,  groups  generally  will  want  to  manage  services  internally,  taking  advantage  of  their 
integration  and  management  controls.  Third,  the  reward  formula  may  include  the  PCR,  meaning 
that  higher  PCRs  lead  to  higher  shares  of  overall  Medicare  savings. 

However,  the  PCR  may  convey  some  ambiguities.  For  example,  if  a  group's  Medicare 
patient  population  expands  and  new  patients  tend  to  have  lower  proportions  of  services  within 


65 


the  group,  the  PGR  would  decrease.  Similarly,  the  PGR  would  fall  initially  if  the  group  pursues 
a  vigorous  policy  of  cost  and  utilization  control  within  its  own  system,  with  a  lag  in  control  of 
outside  utilization.  Furthermore,  the  PGR  may  not  be  an  accurate  reflection  of  the  actual 
proportion  of  patient  management  by  the  group  since  it  may  fail  to  take  informal  alliances  into 
account.'^ 

c.       Services  Provided 

Another  way  that  groups  might  evaluate  their  performance  is  to  monitor  the  types  and 
volume  of  services  they  provide,  as  well  as  the  sites  at  which  they  are  provided.  Groups  might 
evaluate  themselves  on  whether  appropriate  but  less  expensive  sites  are  chosen  for  the  delivery 
of  services.  An  example  would  be  to  deliver  sub-acute  services  in  a  skilled  nursing  facility 
versus  an  acute  care  hospital.  When  groups  receive  data  on  the  proportion  of  services  received 
within  and  outside  their  system,  they  can  use  that  information  to  evaluate  how  successful  their 
patient  retention  strategies  have  been,  and  in  what  clinical  areas. 

XI.      Simulations  of  Medicare  Expenditures  and  Rewards  to  Groups  Under  G  VPS 

In  order  to  illustrate  the  flow  of  expenditures  imder  GVPS,  this  section  simulates  the 
overall  financial  impact  of  implementing  GVPS  on  three  parties:  Medicare,  GVPS  groups,  and 
other  physician  practices.  We  use  a  simulation  model  that  incorporates  baseline  information 
about  Medicare  and  the  groups,  along  with  a  set  of  assumptions  about  the  future  evolution  of 
Medicare  with  and  without  GVPS.  We  evaluate  various  scenarios  by  changing  different 
assumptions  in  the  simulation  model. 

A.       Analytic  Framework 

1 .       Defining  Financial  Impact 

For  the  purposes  of  the  simulations,  financial  impact  is  defined  as  changes  in  total 
Medicare  reimbursements  for  applicable  services,  plus  any  reward  payments.  Before  proceeding, 
it  is  worth  noting  what  this  definition  omits.  For  HCFA,  reimbursements  plus  reward  payments 
really  do  constitute  Medicare's  financial  bottom  line,  although  HCFA  also  is  concerned  with 
other  impacts  such  as  those  affecting  provider  viability  or  beneficiary  access.  For  providers, 
changes  in  reimbursement  levels  are  a  less  exact  measure  of  financial  impact,  since  provider 
costs  should  be  considered  as  well  as  revenues.  For  example,  if  reductions  in  volume  cause  a 
provider's  revenues  to  decrease  by  $10  million,  this  does  not  mean  that  the  provider's  net  income 


'*As  mentioned  earlier,  an  unresolved  policy  and  legal  issue  is  the  nature  of  arrangements 
between  a  physician  group  and  other  providers  that  would  permit  the  latter  to  be  included  in  the 
group's  PGR. 


66 


has  fallen  by  $10  million.  In  reality,  volume  decreases  would  cause  a  decline  in  the  provider's 
costs  as  well  as  revenues,  although  not  necessarily  in  proportion.  This  consideration  is  more 
relevant  over  longer  time  horizons,  where  providers  have  more  ability  to  implement  changes  in 
their  cost  structures. 

2.  Time  Horizon 

A  time  frame  of  five  years  is  used  for  the  simulations.  For  shorter  periods,  the  effect  of 
GVPS  on  the  rest  of  the  Medicare  program  would  be  less  apparent,  as  there  would  be  less  time 
for  interactions  to  come  into  play. 

3.  Relevant  Services 

The  simulation  model  concerns  the  impact  of  GVPS  on  reimbursements  for  all  Medicare 
services  (Parts  A  and  B). 

4.  Defining  a  Base  Case 

The  approach  taken  is  as  follows: 

»■        A  base  case  GVPS  scenario  is  defined,  comparing  the  distribution  of  reimbursements 
under  GVPS  to  that  which  would  be  found  without  GVPS. 

►  The  sensitivity  of  the  results  to  changing  assumptions  is  examined.  This  involves  starting 
firom  the  base  case  scenario  and  varying  each  major  assumption  in  turn.  For  example, 
what  if  GVPS  providers  were  paid  a  higher  share  of  the  savings  achieved,  holding  other 
assumptions  at  base  case  values? 

B.  Assumptions 

The  simulation  model  includes  three  kinds  of  assumptions: 

Assumptions  that  must  be  made  about  the  Medicare  environment,  regardless  of  GVPS, 

►  Assumptions  relative  to  the  design  features  of  GVPS, 

Assumptions  concerning  the  likely  impacts  on  provider  behavior  of  a  GVPS  program. 

1 .        Assumptions  About  the  Medicare  Environment 

Default  growth  rates.  Even  in  the  absence  of  GVPS,  we  assume  that  service  volume 
growth  will  be  more  restrained  for  care  delivered  by  the  proposed  GVPS  groups,  compared  to 


67 


other  providers.  This  is  because  groups  that  operate  under  GVPS  are  more  likely  to  proceed  with 
cost-reducing  innovations  because  of  other  managed  care  incentive  arrangements. 

We  therefore  assume  that  without  GVPS,  the  volume  and  intensity  of  all  Medicare 
services  will  increase  by  10  percent  for  patients  never  seen  by  the  GVPS  groups.  For  patients 
seen  at  least  once  by  these  groups,  we  assume  that  volume  and  intensity  growth  will  be  7.5 
percent  for  care  delivered  by  the  group  itself,  and  8  percent  for  care  delivered  to  these  same 
patients  by  other  providers.  The  latter  assumption  reflects  the  idea  that  patients  seen  by  the 
groups  are  being  managed  differently,  and  this  difference  also  applies  somewhat  to  the  care  the 
patients  receive  from  other  providers. 

Medicare  enrollment  and  costs.  We  assume  that  Medicare  has  30  million  beneficiaries 
using  services  on  a  fee-for-service  basis.  For  simplicity,  we  do  not  project  any  enrollment 
growth  over  the  five-year  period.  Patients  seen  at  GVPS  groups  are  assumed  to  average  $7,000 
in  total  Medicare  reimbursements  in  the  base  year.  For  other  beneficiaries,  the  average  per- 
person  reimbursement  for  all  Medicare  services  is  set  at  $5,000.  These  RPUPS  values  were 
chosen  as  representative  of  the  differentials  observed  between  our  selected  provider  sample  and 
their  market  areas. 

The  difference  in  average  reimbursements  is  large.  However,  this  probably  accurately 
reflects  differences  in  case  mix  and  service  mix  between  the  GVPS  groups  and  other  providers, 
which  ultimately  yield  higher  average  costs.  These  differences  in  RPUPS  levels  are  a  source  of 
opportunity  for  Medicare  and  the  groups,  in  that  large  savings  could  result  fi-om  initiatives 
targeted  at  this  high-cost  population. 

Cost  inflation  factor.  For  the  purposes  of  the  simulation,  we  assume  that  the  fees  paid 
by  Medicare  for  MVPS  services  are  increased  by  a  cost  inflation  factor  each  year.  In  the 
simulations,  the  same  update  for  inflation  of  service  costs  is  also  applied  to  other  Medicare 
services.  We  assume  that  inflation  increases  by  5  percent  per  year  in  all  five  years. 

Medicare  Volume  Performance  Standards.  We  assimie  that  throughout  the  period 
considered.  Medicare  sets  a  target  of  10  percent  annual  growth  in  volume  and  intensity.  This 
assumption  ensures  that  all  providers  meet  the  performance  standard,  since  even  the  nongroup 
providers  only  increase  their  volume  and  intensity  by  1 0  percent  annually.  Therefore,  in  the 
absence  of  GVPS,  all  providers  would  receive  a  full  update  (the  cost  inflation  factor)  to  the  fee 
schedule  for  MVPS  services  (i.e.,  no  penalty).  As  a  result,  any  changes  in  update  factors 
observed  in  the  simulations  can  be  clearly  attributed  to  the  impact  of  GVPS. 

Expenditure  Targets  for  Non-MVPS  Services.  The  Medicare  services  currently 
included  in  the  MVPS  methodology  represent  a  select  set  of  Part  B  services  (largely  physician 
and  other  professional  services).  All  other  Part  A  and  Part  B  services  do  not  have  target  rates  of 
growth  with  the  size  of  future  fee  increases  subject  to  penahies  for  excessive  growth.  In  the 
simulations,  however,  we  are  examining  scenarios  where  GVPS  groups  are  evaluated  for 


68 


managing  the  growth  of  average  reimbursements  per  patient  seen  for  all  Part  A  and  Part  B 
services.  Therefore,  we  assume  in  the  simulations  that  HCFA  has  implemented  volume 
performance  standards  for  non-MVPS  services  analogous  to  the  MVPS. 

Non-MVPS  services  then  have  a  volume  performance  standard  rate  of  growth  of  1 0 
percent  in  the  model.  Since  even  the  non-GVPS  providers  are  growing  at  this  rate  for  all 
services,  all  providers  will  operate  within  this  target  and  be  eligible  for  a  full  increase  in  payment 
rates  according  to  the  cost  inflation  factor.  This  update  factor  will  be  reduced  only  by  the  cost  of 
GVPS  reward  payments. 

2.       Assumptions  about  the  GVPS  Policy  Design 

Computation  of  savings.  Savings  in  reimbursements  due  to  the  GVPS  policy  are 
computed  by  comparing  actual  payments  for  patients  seen  by  the  groups  to  projected  payments 
in  the  absence  of  GVPS.  Projected  payments  are  found  by  applying  the  specified  volume  grow^ 
target  to  the  volume  index  for  group  providers  in  the  base  year. 

Annual  rebasing  of  targets.  An  important  design  consideration  is  whether  the  volume 
performance  targets  are  rebased  annually  to  reflect  the  GVPS  groups'  year-by-year  performance. 
This  approach  causes  a  "ratchet  effect"  with  undesirable  incentive  properties  which  are  discussed 
elsewhere  in  this  report.  Simply  stated,  a  group  that  reduces  volume  not  only  loses 
reimbursements  from  forgone  fees  in  the  current  year,  but  it  also  faces  a  tougher  target  in  the 
following  year.  We  present  results  both  with  and  without  armual  rebasing  of  targets. 

Savings  sharing  rate.  Rewards  in  the  simulation  model  are  computed  in  the  following 
manner: 

Reward  =  Medicare  Savings  x  Patient  Capture  Ratio  x  Sharing  Rate 

In  this  formula  the  groups  are  not  compensated  for  the  fiill  amount  of  projected  savings. 
This  approach  is  taken  for  two  reasons.  First,  the  savings  amount  will  include  reimbiu-sements 
forgone  by  other  providers,  not  simply  those  forgone  by  the  GVPS  group.  This  follows  from  the 
fact  that  each  group  is  evaluated  according  to  how  well  it  managed  all  care  delivered  to  its 
patients,  not  just  the  care  it  provides  directly.  Applying  the  PCR  to  the  savings  amount  corrects 
for  this  fact. 

Secondly,  reimbursements  forgone  are  an  overstatement  of  net  income  forgone,  as 
discussed  earlier.  The  sharing  rate  therefore  defines  the  percentage  of  reimbursements  lost  by  the 
group  through  efficiency  that  will  be  paid  by  HCFA  as  a  reward.  The  base  case  considered  is  75 
percent,  with  HCFA  retaining  the  other  25  percent  portion.  It  is  important  to  note,  however,  that 
HCFA  also  retains  the  entire  amount  beyond  the  group's  attributed  percentage  (PCR). 


69 


Updates  to  fees  for  Medicare  Part  A  and  Part  B  services.  In  the  absence  of  GVPS,  we 
assume  that  HCFA  updates  fees  for  all  services  in  accordance  with  the  cost  inflation  factor,  less 
any  penalties  for  failing  to  meet  volume  performance  standards.  The  maximum  feasible  update 
is  therefore  5  percent  per  year,  from  our  assumption  about  the  cost  inflation  factor. 

In  the  scenarios,  assume  the  fee  update  under  GVPS  is  set  as  follows: 

Update  factor  =  cost  inflation  growth  rate 

Less  (Adjustment  to  finance  rewards  to  groups) 

We  assume  that  the  broad-based  performance  penalty  is  determined  by  evaluating  whether  the 
volume  growth  target  was  actually  met  by  non-GVPS  providers.  The  alternative  would  be  to 
evaluate  volume  growth  achieved  by  all  providers.  We  do  not  recommend  or  model  this  option, 
because  of  its  potentially  undesirable  effects.  If  the  GVPS  groups  were  included  in  the  measure 
of  national  volume  performance,  then  the  more  they  restrained  volume  growth,  the  better  the 
resulting  measure  of  national  performance  would  look.  As  a  result,  updates  under  GVPS  would 
be  higher  for  everybody  than  without  GVPS,  even  if  the  non-GVPS  providers  failed  to  meet  their 
collective  targets. 

This  would  have  two  undesirable  results.  First,  the  incentive  properties  of  GVPS  for 
other  (i.e.,  non-GVPS)  providers  would  be  dampened,  as  they  could  "free  ride"  on  the  efforts  of 
the  groups,  and  still  get  ample  updates.  Second,  the  cost  to  HCFA  of  paying  higher  updates  to 
non-GVPS  providers  would  reduce  or  even  nullify  the  government's  net  savings  from  the  GVPS 
initiative,  casting  doubt  over  the  program's  long  term  sustainability. 

In  order  to  ensure  budget-neutrality  of  the  program,  the  proposed  formula  also  includes 
an  adjustment  in  order  to  finance  rewards.  The  adjustment  is  designed  to  equate  projected 
Medicare  payments  in  the  update  year  with  GVPS  (including  reward  payments)  and  without 
GVPS  (using  the  fee  update  net  of  any  performance  penalty).  In  the  simulations,  actual  volume 
growth  is  in  fact  equal  to,  or  less  than  target  volume  growth.  As  a  result,  the  only  reductions  to 
the  update  factor  observed  are  due  to  the  paying  of  rewards  to  GVPS  groups. 

3.       Assumptions  About  Providers  Under  a  GVPS  Program 

Patient  Capture  Ratio.  For  simulating  the  effect  of  GVPS,  a  key  characteristic  of  a 
GVPS  group  is  its  capture  ratio.  For  a  given  group,  the  PCR  is  its  share  of  the  annual  utilization 
dollars  for  the  patients  it  sees  in  the  relevant  year.  A  group  that  provides  a  little  primary  care 
(and  nothing  else)  to  many  patients  would  likely  have  a  low  PCR  when  compared  to  a  group  that 
provides  more  primary  care  and/or  costly  tertiary  care  to  its  patients. 

Based  on  data  that  we  have  reviewed,  we  use  a  baseline  PCR  of  40  percent  in  the 
simulations,  for  all  Medicare  services.  For  some  scenarios  we  consider  a  gradual  increase  in 
capture  ratio  over  time,  amounting  to  two  percentage  points  a  year.  However,  in  the  base  case 


70 


scenario  we  assume  no  changes  in  the  PCR  in  order  to  avoid  over-complicating  the  interpretation 
of  other  effects.  In  order  to  enable  the  calculations  to  work  out,  the  PCR  does  trend  downward 
slightly  over  the  five  years. 

Reduction  in  service  utilization  and  rates  of  growth.  In  the  base  case  scenario,  we 
assume  that  the  groups  will  respond  to  GVPS  and  succeed  in  reducing  the  annual  growth  of 
service  volume  and  intensity  for  their  Medicare  patients.  This  will  include  reductions  in  these 
patients'  use  of  services  from  other  providers  as  well.  For  care  directly  provided  by  the  groups, 
utilization  growth  will  be  1  percent  lower  than  it  would  have  been  without  GVPS  (i.e.,  6.5% 
annually).  In  addition,  the  groups  will  be  managing  the  care  their  patients  receive  from  other 
providers.  We  assume  the  success  of  this  management  depends  on  a  group's  PCR.  Therefore, 
the  GVPS  groups  with  40  percent  capture  will  achieve  only  40  percent  of  the  reduction  in 
utilization  growth  for  externally-provided  care  that  they  achieve  for  the  care  they  provide 
directly.  In  the  base  case,  externally-provided  care  therefore  grows  at  0.4  percentage  points 
below  its  non-GVPS  rate  of  8  percent  (0.4  x  1%  =  0.4%),  so  this  volume  grows  at  7.6  percent 
annually. 

One  of  the  most  compelling  features  of  the  GVPS  approach  is  the  fact  that  GVPS  groups 
have  an  incentive  to  reduce  utilization  in  much  the  same  manner  that  capitated  HMO  providers 
do,  even  though  GVPS  groups  are  still  paid  on  a  fee-for-service  basis.  Therefore,  we  anticipate 
that  any  group  entering  the  GVPS  program  will  move  immediately  to  reduce,  where  clinically 
appropriate,  the  quantity  of  services  utilized  by  the  group's  patients  below  existing  levels.  As  a 
result,  groups  responding  to  GVPS  do  not  only  restrain  the  rate  of  growth  in  service  utilization 
by  their  patients,  but  also  achieve  reductions  in  the  absolute  levels  of  service  utilization.  The 
base-year  service  utilization  has  some  excess  built-in  due  to  the  existing  fee-for-service 
incentives.  Groups  deciding  to  participate  in  GVPS  take  steps  to  cut  out  this  excess,  since  they 
will  be  rewarded  for  savings.  In  the  simulations,  therefore,  we  assume  that  GVPS  groups  cut  the 
RPUPS  for  their  patients  7  percent  ($7,000  to  $6,510)  upon  entering  the  program. 

For  patients  never  seen  by  GVPS  groups,  volume  and  intensity  for  all  Medicare  services 
are  assumed  to  continue  growing  at  the  default  rate  of  10  percent  per  year,  with  or  without 
GVPS.  This  rate  of  growth  is  applied  to  the  base  year  RPUPS  level  of  $5,000. 

Increase  in  the  proportion  of  Medicare  beneficiaries  seen  by  GVPS  groups.  The 

base  case  scenario  assumes  no  growth  in  overall  Medicare  enrollment,  with  the  percentage  of 
beneficiaries  seen  by  GVPS  groups  fixed  at  10  percent.  An  alternative  scenario  allows  for  an 
expanded  GVPS  program  with  groups  seeing  an  additional  15  percent  of  Medicare  beneficiaries, 
so  that  25  percent  of  all  beneficiaries  are  receiving  care  fi-om  GVPS  providers  for  five  years. 

For  this  alternative  GVPS  enrollment  scenario,  we  assume  that  the  additional  patients 
have  the  same  initial  RPUPS  as  the  groups'  patient  populations  in  the  base  case  scenario.  This 
implies  that  the  GVPS  groups  are  attracting  higher-cost  beneficiaries,  and  the  average 
reimbursement  outside  the  groups  must  be  correspondingly  lower.  Therefore,  in  this  alternative 


71 


scenario  we  assume  that  average  reimbursements  for  patients  never  seen  by  GVPS  groups  (75% 
of  the  30  million  beneficiaries  that  use  services)  decline  from  an  RPUPS  value  of  $5,000  to 
$4,600.  The  issue  of  case  mix  is  further  discussed  below. 

Change  in  patient  case  mix  at  groups.  There  is  potential  for  some  of  the  groups' 
initiatives  to  alter  the  mix  of  patients  they  see,  leading  to  changes  in  their  RPUPS  levels.  For 
example,  a  group  might  expand  primary  care  offerings,  thereby  reducing  an  RPUPS  which  was 
previously  high  because  of  a  focus  on  specialty  care.  To  the  extent  that  any  risk  adjustment 
methods  failed  to  correct  for  such  changes,  there  would  then  be  a  form  of  the  biased  selection 
problem  familiar  from  HCFA's  experience  with  HMOs.  An  important  difference  is  that  the 
groups  would  not  be  capitated,  and  therefore  would  face  weaker  incentives  to  favorably  select. 
Like  other  fee-for-service  providers,  they  face  immediate  loss  of  fee-for-service  reimbursements 
if  they  avoid  potentially  costly  patients,  and  this  loss  is  unlikely  to  be  outweighed  by  the  promise 
of  partial  compensation  in  the  future  through  the  GVPS  reward  payments.'^ 

4.  Summary:  The  Base  Case  Scenario 

As  noted  above,  the  simulation  approach  required  a  base  GVPS  scenario,  which  could 
then  be  varied  on  different  dimensions.  The  base  case  GVPS  scenario  has  been  defined  as 
follows: 

Medicare  Environment 

1)  30  million  beneficiaries  use  services  each  year. 

2)  GVPS  groups  see  10  percent  of  Medicare  patients. 

3)  $156  billion  in  Medicare  spending  for  all  services. 

4)  Cost  inflation  factor  grows  5  percent  annually  for  the  5  years. 

5)  Volume  performance  standard  for  all  services  allows  for  10  percent  growth  in  service 
volume  annually. 

GVPS  Policy  Parameters 

1)  Medicare  Savings  under  GVPS  are  the  difference  between  actual  payments  for  services 
to  patients  seen  by  GVPS  groups  and  projected  payments  in  the  absence  of  GVPS. 


'^The  Sharing  Rate  specified  in  the  Reward  formula  would  influence  the  strength  of  the 
•  incentives.  Simply  adding  relatively  healthy  patients  could  be  a  problem  worth  considering 
when  monitoring  results  under  GVPS.  Appendix  C  discusses  excluding  from  RPUPS 
calculations  patients  with  low  reimbursements  to  the  group,  effectively  ignoring  very  low 
utilizers  in  the  determination  of  Medicare  savings  and  rewards. 


72 


2)  Sharing  Rate:  GVPS  groups  get  rewards  equal  to  75  percent  of  their  share  of  the 
savings  (i.e.,  Medicare  Savings  x  Patient  Capture  Ratio  x  0.75). 

3)  Target  rebasing:  none  over  the  five-year  period 

4)  The  fee  update  factor  is  equal  to  the  cost  inflation  growth  rate,  less  the  cost  of  GVPS 
reward  payments. 

Provider  Characteristics 

1)  GVPS  groups  provide  directly  40  percent  (in  dollars)  of  all  Medicare-covered  services 
that  their  patients  receive  (PCR=0.40). 

2)  Volume  of  services  provided  to  patients  never  seen  by  GVPS  groups  grows  10  percent 
annually,  with  and  without  GVPS. 

3)  Prior  to  GVPS,  the  groups  provide  7.5  percent  more  services  per  year  to  their  patients 
while  other  providers  provide  8  percent  more  services  per  year  to  these  same  patients. 

4)  With  GVPS,  participating  groups  provide  6.5  percent  more  services  per  year  to  their 
patients  while  other  providers  provide  7.6  percent  more  services  per  year  to  these  same 
patients. 

5)  For  patients  seen  by  GVPS  groups,  base  year  RPUPS  =  $7,000. 

6)  For  patients  never  seen  by  GVPS  groups,  base  year  RPUPS  =  $5,000. 

7)  Under  GVPS,  groups  realize  a  7  percent  reduction  in  RPUPS. 
C.  Findings 

1.  Results 

Table  3  presents  results  of  the  simulation  for  the  base  case  scenario,  and  contrasts  them 
with  projected  resuhs  in  the  absence  of  GVPS.  Table  3  shows  that  under  GVPS,  the  groups  lose 
$1 .988  billion  in  reimbursements  in  year  5  (12.92%  of  what  they  would  have  received  without 
GVPS).  This  loss  is  more  than  offset  by  a  reward  of  $2,509  billion  for  their  success  in  meeting 
targets.  With  the  reward,  the  groups  are  3.38  percent  better  off  with  GVPS  than  without.  The 
non-GVPS  providers  also  face  lower  reimbursements  under  GVPS,  but  the  losses  are  spread  over 
a  much  larger  base,  and  therefore  only  account  for  2.73  percent  of  their  year  5  reimbursements 
without  GVPS.  Finally,  Medicare  saves  2.44  percent  of  total  reimbursements  for  year  5  with 
GVPS  ($7,709  billion),  since  higher  payments  to  groups  are  more  than  offset  by  lower  payments 
to  non-GVPS  providers. 


73 


Table  3 

Distribution  of  payments  with/without  GVPS 
Scenario:  GVPS  Base  Case* 


Payments  (SMedicare)  in  Year  5 

Scenario 

Difference  (%  change)  with  GVPS 

GVPS 

No  GVPS 

Reimbursements  to  GVPS  groups 
Reward  payments  to  GVPS  groups 

13,403 
2,509 

15,391 
0 

-1,988  (-12.92) 
+2,509 

Total  group  income 

15,912 

15,391 

+521  (+3.38) 

Reimbursements  to  non-GVPS  providers 

292,887 

301,116 

-8,230  (-2.73) 

Total  payments  by  Medicare 

308,798 

316,507 

-7,709  (-2.44) 

Table  4 

Decomposition  of  GVPS 
Scenario:  GVPS  Base  Case* 


Payments  (SMedicare)  in 
Year  5 

Change  in  Payments  (Compared  to  No  GVPS) 

To  GVPS  Groups 

To  Non-GVPS  Providers 

Total 

Reductions  in  Volume 

-1,700 

-2,595 

-4,295 

Reductions  in  Updates 

-288 

-5,635 

-5,923 

Reward  Payments 

+2,508 

0 

+2,509 

Total 

+521 

-8,230 

-7,709 

*  GVPS  groups  see  10%  of  beneficiaries  that  use  services  in  every  year 


74 


Table  4  provides  insight  as  to  the  source  of  the  $7,709  billion  savings  for  Medicare  in  the 
fifth  year  of  GVPS,  by  decomposing  this  amount  into  price  and  volume  changes.  It  may  be  seen 
that  for  the  GVPS  groups  the  larger  share  of  the  savings  comes  from  reduced  utilization,  which 
in  the  model  results  from  the  GVPS  groups'  activities.  Since  the  groups  are  managing  all  care 
for  their  patients,  and  non-GVPS  providers  account  for  60  percent  of  this  care,  the  non-GVPS 
providers  also  lose  reimbursements  as  volume  is  reduced.  In  addition,  both  group  and  non- 
GVPS  providers  receive  lower  updates  in  order  to  finance  the  reward  payments  to  the  groups.  It 
is  worth  noting  that  while  all  non-GVPS  providers  will  experience  the  effect  of  GVPS  through 
lower  updates,  the  volume  reduction  effects  will  be  experienced  only  by  those  who  see  patients 
managed  by  the  GVPS  groups.  For  the  most  part,  these  would  be  providers  located  in  the 
groups'  market  areas. 

Table  5  addresses  the  effects  of  GVPS  over  time,  by  comparing  volume  and  payments  per 
beneficiary  in  year  5,  v^th  and  without  GVPS.  Without  GVPS,  volume  growth  for  Medicare 
over  the  five  years  is  60.5  percent,  and  payments  per  beneficiary  increase  by  102.9  percent.  Note 
that  even  without  GVPS,  the  groups'  efficiency  ensures  that  they  experience  slower  volume 
growth  than  non-GVPS  providers.  With  GVPS,  the  non-GVPS  providers  supply  the  same  rate  of 
volume  growth  as  without  GVPS  (62.6%),  and  GVPS  reduces  their  payment  growth  by  reducing 
their  updates.  However,  volume  increases  by  only  30.5  percent 

Table  5 


Volume  and  Payments  Change  Over  Time  with/without  GVPS 
Scenario:  GVPS  Base  Case* 


Payments  (SMedicare) 

Percent  Change 

Volume  per  beneficiary 
(index) 

Base 
Year 

Years 

GVPS 

No 
GVPS 

GVPS 

No  GVPS 

Beneficiaries  seen  by  GVPS 
groups 

134.6 

175.7 

197.8 

30.5% 

47.0% 

Other  beneficiaries 

96.2 

156.3 

156.3 

62.6% 

62.6% 

All  beneficiaries 

100.0 

158.3 

160.5 

58.3% 

60.5% 

Payments  per  beneficiary 

Beneficiaries  seen  by  GVPS 
groups 

$7,000 

$11,331 

$13,006 

61.9% 

85.8% 

Other  beneficiaries 

$5,000 

$10,085 

$10,277 

101.7% 

105.5% 

All  beneficiaries 

$5,200 

$10,210 

$10,550 

96.3% 

102.9% 

*  GVPS  groups  see  10%  of  beneficiaries  in  every  year 


75 


for  the  patients  seen  at  groups,  and  payments  for  them  increase  by  only  61.9  percent.  As  a  result, 
payments  for  all  beneficiaries  increase  by  96.3  percent  over  the  five  years  with  GVPS,  which  is 
lower  than  the  growth  of  102.9  percent  that  would  have  occurred  without  GVPS. 

2.  Sensitivity  to  Policy  Parameters 

Table  6  examines  the  sensitivity  of  our  results  to  various  changes  in  the  policy 
parameters.  It  may  be  seen  that  increasing  the  sharing  rule  from  75  percent  to  95  percent  reduces 
slightly  the  total  payments  by  Medicare  in  year  5.  However,  it  increases  the  groups'  gain  fi-om 
implementation  of  GVPS,  from  3.38  percent  to  7.18  percent  above  their  reimbursement  total 
without  GVPS. 

Of  greater  importance  is  the  rebasing  rule.  The  use  of  annual  rebasing  would  make 
GVPS  a  money-loser  for  the  groups,  reducing  their  revenues  9.64  percent  below  the  GVPS  year 
5  amount  of  $15,912  billion  in  the  base  case.  This  reflects  the  ratchet  effect  of  continually 
adjusting  targets  based  on  actual  performance.  However,  the  groups'  loss  in  this  case  is  not  a 
gain  for  Medicare.  Instead,  the  benefits  accrue  to  non-GVPS  providers,  who  receive  higher 
updates  (and  therefore  smaller  revenue  losses)  than  they  would  otherwise.  This  is  because 
rebasing  reduces  measured  savings,  and  therefore  reduces  the  rewards  to  GVPS  groups  which 
would  otherwise  be  financed  through  lower  updates. 

3.  Sensitivity  to  Other  Assumptions 

Table  6  also  addresses  the  sensitivity  of  results  to  varying  the  assumptions  about  program 
impacts.  If  the  groups  reduced  volume  growth  to  4.5  percent  instead  of  6.5  percent,  they  would 
increase  their  income  in  year  5  by  1 .67  percent  of  the  value  without  GVPS.  The  income  gain  is 
smaller  than  the  3.38  percent  achieved  in  the  base  case  scenario.  This  suggests  that  the 
additional  rewards  for  curbing  utilization  more  tightly  are  ultimately  outweighed  by  the  loss  of 
fee-for-service  reimbursements.  With  the  4.5  percent  growth  variation,  Medicare  would  save 
2.93  percent  of  year  5  payments  without  GVPS,  compared  to  2.44  percent  savings  in  the  base 
case  with  6.5  percent  utilization  growth. 

Alternatively,  if  the  GVPS  groups  increased  their  PGR  by  2  percent  per  year  in  addition 
to  achieving  the  baseline  utilization  savings  for  Medicare,  they  would  greatly  increase  their  fee- 
for-service  reimbursements.  In  this  scenario  variation,  the  groups'  revenues  in  year  5  would  be 
29.3  percent  higher  than  without  GVPS.  For  Medicare,  this  scenario  resuhs  in  a  0.09  percentage 
point  larger  payment  reduction  than  the  GVPS  base  case  because  care  is  being  transferred  from 
other  providers  to  GVPS  groups,  who  are  presumed  to  control  utilization  growth. 

Lastly,  Table  7  presents  the  results  of  the  enrollment  scenario  where  GVPS  groups  see  25 
percent  of  the  beneficiaries  that  use  services,  as  compared  to  10  percent  of  beneficiaries  in  the 
GVPS  base  case  scenario.  This  alternative  is  labeled  the  GVPS  25 


I 


76 


Table  6 


Effect  of  Varying  Program  Impacts  on  Payments  Under  GVPS 
■  GVPS  Groups  see  10%  of  Beneficiaries  that  Use  Services 


Varying  Assumptions 

Payments  (SMedicare)  in 
Year  5 

Percent  Change  from  No 
GVPS 

Scenario 

Groups' 
Utilization 
Growth 
Rate 

Annual 
Increase 
in 

Capture 

Groups' 
Share  of 
Savings 

Annually 
Rebase 
Groups' 
Targets? 

To 
Groups 

To 
Others 

Total 

Groups 

Others 

Total 

No  GVPS 

15,391 

301,116 

316,507 

GVPS  Base  Case 

6.5% 

0 

75% 

No 

15,912 

292,887 

308,798 

+3.38 

-2.73 

-2.44 

Variants 

Vary  Savings  Share 

6.5% 

0 

95% 

No 

16,497 

291,401 

307,898 

+7.18 

-3.23 

-2.72 

Vary  Rebasing  Rule 

6.5% 

0 

75% 

Yes 

13,907 

296,665 

310,572 

-9.64 

-1.48 

-1.88 

Vary  Utilization  Growth 

4.5% 

0 

75% 

No 

15,648 

291,570 

307,218 

+1.67 

-3.17 

-2.93 

Vary  Capture  Growth 

6.5% 

2% 

75% 

No 

19,900 

288,593 

308,494 

+29.30 

-4.16 

-2.53 

77 


Table  7 

Effect  of  Varying  Program  Impacts  on  Payments  Under  GVPS 
GVPS  Groups  see  25%  of  Beneficiaries  that  Use  Services 


Varying  Assumptions 

Payments  (SMedicare)  in 
Years 

Percent  Change  from  No 
GVPS 

Scenario 

Groups' 
Utilization 
Growth 
Rate 

Annual 
Increase 
in 

Capture 

Groups' 
Share  of 
Savings 

Annually 
Rebase 
Groups' 
Targets? 

To 
Groups 

To 
Others 

Total 

Groups 

Others 

Total 

No  GVPS  , 

38,478 

271,812 

310,289 

GVPS  25%  Scenario 

6.5% 

0 

75% 

No 

38,619 

252,647 

291,266 

+0.37 

-7.05 

-6.13 

Variants 

Vary  Savings  Share 

6.5% 

0 

95% 

No 

39,713 

249,322 

289,036 

+3.21 

-8.27 

-6.85 

Vary  Rebasing  Rule 

6.5% 

0 

75% 

Yes 

34,443 

261,139 

295,581 

-10.49 

-3.93 

-4.74 

Vary  Utilization  Growth 

4.5% 

0 

75% 

No 

37,848 

249,572 

287,420 

-1.64 

-8.18 

-7.37 

Vary  Capture  Growth 

6.5% 

2% 

75% 

No 

48,082 

242,411 

290,494 

+24.96 

-10.82 

-6.38 

78 


percent  scenario  in  the  table.  Expanding  the  proportion  of  beneficiaries  seen  by  the  more 
efficient  GVPS  providers  yields  even  greater  savings  to  Medicare.  Medicare  saves  more  than 
$19  billion  in  year  5  payments  (6.13%),  compared  to  spending  without  GVPS.  In  contrast  to  the 
GVPS  base  case,  groups  in  the  25  percent  scenario  are  only  0.37  percent  better  off  in  terms  of 
fifth  year  revenues  than  in  the  absence  of  GVPS.  Apparently,  expansion  in  the  size  of  reward 
payments  has  the  effect  of  reducing  fee  updates  to  the  extent  that  groups  gain  greater  net 
revenues  with  10  percent  enrollment  than  25  percent. 

Changing  the  policy  parameters  imder  the  GVPS  25  percent  scenario  has  similar  effects 
to  those  observed  for  the  GVPS  base  case.  Increasing  the  groups'  share  of  savings  from  75 
percent  to  95  percent  expands  their  net  revenues  gain  from  0.37  percent  to  3.21  percent  ($1,235 
billion),  and  Medicare  achieves  a  0.72  percentage  point  increase  in  savings.  Once  again,  the 
variation  with  annual  rebasing  of  targets  results  in  the  groups  receiving  lower  payments  than 
without  GVPS  (a  loss  of  10.49%).  Medicare's  fifth  year  savings  decline  with  armual  rebasing 
from  more  than  $  1 9  billion  to  $  1 4.7  billion. 

Table  7  also  displays  the  result  of  assuming  GVPS  groups  under  the  25  percent  scenario 
respond  by  limiting  utilization  growth  to  4.5  percent  rather  than  6.5  percent.  Under  these 
circumstances,  the  groups  end  up  with  1 .64  percent  lower  payments  than  in  the  absence  of 
GVPS,  while  Medicare  gains  an  additional  1.24  percent  in  savings.  The  last  variation  presented 
in  Table  7  models  the  result  of  allowing  groups  to  increase  their  PGR  2  percent  per  year  over  the 
five  years.  GVPS  groups  in  this  variation  realize  a  24.96  percent  gain  ($9.6  billion)  in  year  5  net 
revenues.  Medicare  payments  in  year  5  are  approximately  $19.8  billion  below  their  projected 
level  wdth  no  GVPS  program. 

D.       Discussion  of  Simulation  Results 

The  results  in  this  section  suggest  that  there  are  combinations  of  GVPS  design  and  group 
activities  that  would  generate  gains  for  both  Medicare  and  the  groups.  The  most  favorable 
scenarios  are  those  in  which  the  groups  expand  the  proportion  of  Medicare  patients  they  see, 
since  this  moves  more  patients  into  a  slower-growing  environment.  As  a  result,  both  the  groups 
and  Medicare  would  benefit.  Medicare  is  also  affected  by  greater  or  lesser  effectiveness  of  the 
groups'  utilization  controls,  with  Medicare  gaining  more  savings  as  the  groups  control  growth 
better. 

Policy  parameters  differ  in  their  importance  to  the  success  of  GVPS.  Use  of  annual 
rebasing  would  reduce  the  groups'  net  income  below  the  level  in  the  absence  of  GVPS. 
Alterations  in  the  sharing  rule  could  also  affect  how  well  groups  do  under  GVPS.  Group 
participation  could  be  deterred  by  overly  restrictive  policies  in  these  two  areas. 

The  results  in  this  section  suggest  that  GVPS  could  potentially  provide  Medicare  with 
billions  of  dollars  in  savings.  The  long-term  impact  of  shifting  beneficiaries  from  unmanaged, 
fast-growth  settings  to  slow-growth,  efficient  providers  could  be  of  great  significance  to  HCFA. 


79 


This  policy  could  offer  long-term  gains  beyond  an  immediate  reduction  in  reimbursements. 
Quality,  cost-effective  providers  will  have  an  incentive  under  GVPS  to  provide  services  and 
manage  the  care  of  the  most  expensive  Medicare  beneficiaries.  • 

XII.     Conclusions  and  Recommendations 

Medicare  has  experienced  large  increases  in  spending  during  recent  years,  and  most 
projections  suggest  these  increases  could  continue.  Policymakers  have  debated  the  merits  of 
regulation,  such  as  rate  setting,  versus  market-oriented  solutions,  such  as  managed  care.  We 
believe  that  the  regulatory  framework  established  for  MVPS  is  useful  for  achieving  budgetary 
goals.  However,  we  also  believe  it  would  be  useful  to  supplement  the  current  system  with 
economic  incentives  that  encourage  the  management  of  services.  Many  physicians  and 
administrators  who  contributed  to  this  study  even  commented  that  incentives  under  the 
traditional  fee-for-service  payment  system — with  or  without  MVPS — were  out  of  step  with  their 
current  efforts  to  manage  care  and  improve  efficiency. 

Managing  services  more  effectively  may  elicit  large  savings  from  lower  utilization  rates, 
but  bringing  beneficiaries  into  managed  care  environments  can  be  difficult.  Medicare  risk 
contracts  with  HMOs  offer  one  opportunity.  Capitation  can  create  incentives  for  efficiency  that 
encourage  managed  care.  However,  participation  by  an  HMO  is  largely  contingent  on  positive 
financial  resuhs.  In  turn,  enrollment  by  Medicare  beneficiaries  into  an  HMO  is  contingent  on 
better  benefits  and/or  lower  premiums  than  competing  Medicare  supplemental  policies.  The 
current  system  pays  HMOs  95  percent  of  estimated  costs  and  therefore  could  save  Medicare  up 
to  5  percent  for  enrollees.  Unfortunately,  Medicare  saves  less  than  5  percent,  or  even  loses 
money,  in  cases  where  the  average  cost  estimates  are  too  high  because  of  favorable  selection. 

We  hypothesize  that  Medicare  could  achieve  greater  savings  from  GVPS  than  from  the 
capitation  system: 

►        First,  the  chances  of  Medicare  losing  money  may  be  less  under  GVPS  because  the 

performance  standards  are  based  on  the  experience  of  the  group.  In  contrast,  capitation 
embodies  "performance  standards"  that  may  have  little  correspondence  to  actual 
enrollees.  Although  there  is  always  error  associated  with  estimating  expected  costs,  the 
experience  of  a  group's  own  patients  may  be  a  more  valid  basis  than  the  experience  of 
other  providers'  patients. 

»■        Second,  the  financial  benefits  of  managing  care  can  be  shared  more  evenly  under  GVPS. 
The  formulas  for  sharing  the  savings  can  give  ample  incentives  and  rewards  to  groups, 
yet  still  allow  Medicare  to  benefit  substantially.  Under  capitation,  any  savings  to 
Medicare  are  capped  at  5  percent  of  mean  reimbursement  levels.  Under  GVPS,  Medicare 
may  keep  the  majority  of  savings  for  patients  seen  by  most  groups. 


80 


►  Third,  under  GVPS  groups  have  incentives  to  serve  and  manage  expensive  Medicare 
patients.  Providers  paid  under  fee-for-service  are  encouraged  to  seek  and  retain  patients 
most  in  need  of  services.  Capitated  health  plans  have  incentives  to  seek  and  retain 
relatively  healthy  members,  not  patients. 

We  also  see  advantages  of  GVPS  over  state  level  MVPS  and  penalizing  hospital  medical 

staffs: 

►  Our  analysis  suggests  that  increases  in  Medicare  costs  are  more  pronounced  for  Part  A 
and  other  non-MVP S  services.  It  would  seem  worthwhile  to  pursue  comprehensive 
policies  that  embrace  all  services.  Under  GVPS,  HCFA  can  follow  reforms  in  the 
industry  and  encourage  management  of  all  services.  Policies  addressing  MVPS  services 
within  states,  or  physician  services  within  the  hospital,  are  relatively  narrow  and  not 
aimed  at  the  major  problem  areas  or  most  promising  solutions. 

►  Also  worthwhile  would  be  coherent  polices  that  link  appropriate  incentives  to  the 
responsible  decision-makers.  We  believe  physician  groups  are  the  optimal  focal  points 
for  comprehensive  and  coherent  Medicare  payment  policies.  Based  on  what  we  found, 
there  are  physician  groups  willing  to  accept  the  challenge. 

►  In  different  ways,  state  level  MVPS  and  hospital  medical  staff  policy  options  are  subsets 
of  potentially  more  comprehensive  GVPS  policies.  Setting  regional  or  local  performance 
standards  is  one  necessary  step  in  the  process  of  establishing  a  GVPS  option,  which 
completes  the  process  by  giving  incentives  to  providers  to  respond.  Hospital  medical 
staffs  are  potential  candidates  for  GVPS,  which  could  give  them  incentives  to  manage 
ambulatory  and  institutional  services. 

HCFA  has  several  parameters  to  consider  for  GVPS,  which  involve  various  tradeoffs.  A 
significant  decision  is  whether  to  stay  with  the  scope  of  physician  and  supplier  services  only. 
Other  decisions  have  to  do  with  the  level  of  complexity  to  build  into  the  algorithms  for  setting 
standards  and  measuring  performance.  Also,  decisions  are  needed  about  the  appropriate  balance 
between  incentives  to  participate,  and  incentives  for  efficiency  among  those  who  participate. 

►  HCFA  has  the  administrative  capacity  and  relevant  data  to  implement  GVPS  for 
physician  and  supplier  services,  or  for  all  Medicare  services.  Most  of  the  administrative 
burden  lies  with  the  physician  services  because  of  their  large  numbers.  Ironically,  adding 
the  other  categories  of  services  increases  the  administrative  burden  relatively  little,  but 
greatly  increases  the  scope  of  the  incentives  and  potential  savings.  We  recommend 
basing  GVPS  on  all  services.  For  non-MVPS  services,  projections  used  in  setting 
capitation  rates  for  HMOs  could  also  be  used  to  set  performance  standards  for  groups. 

►  There  are  a  number  of  potential  refinements  and  variations  discussed  in  this  report.  (See 
Appendix  C).  Again,  they  would  involve  data  and  capacity  that  HCFA  already  has,  but 


81 


would  add  to  the  number  of  steps.  The  value  of  methods  to  dampen  stochastic  effects 
must  be  considered  in  light  of  selected  criteria  for  participation.  Allowing  medium  sized 
groups  to  participate,  for  example,  may  add  to  the  value  of  refinements.  We  recommend 
that  health  status  adjusters  be  employed,  but  further  consideration  is  needed  about  which 
categories  to  use. 

Groups  should  be  given  incentives  for  improving  efficiency.  These  incentives  could  be  in 
the  form  of  rewards  and/or  penalties.  Although  penalties  may  strengthen  incentives  for 
efficiency,  we  believe  that  interest  in  participating  would  be  greatly  reduced  by  the 
prospect  of  losing  money.  Assuming  that  HCFA  is  willing  to  set  cumulative  performance 
standards,  we  recommend  that  concentrated  penalties  not  be  included.  Failure  to 
capitalize  on  an  opportunity  to  manage  care  and  earn  rewards  is  itself  a  sufficient  penalty, 
as  is  rising  above  a  cumulative  target  and  diminishing  chances  for  future  rewards.  Giving 
positive  incentives  similar  to  capitation,  and  allowing  HCFA  to  share  in  the  savings, 
could  reap  significant  benefits  for  Medicare  and  participating  groups. 

Based  on  these  considerations,  we  recommend  that  HCFA  consider  models  with 
parameters  such  as  the  following: 

►  Establish  eligibility  criteria,  such  as  groups  with  primary  care  physicians  and  specialists 
serving  about  8,000  or  more  beneficiaries  per  year,  and  a  Patient  Capture  Ratio  of  at  least 
20  percent  for  physician  services. 

►  For  a  policy  beginning  within  the  next  year,  say  early  in  1996,  choose  1994  as  the  base 
year. 

►  Measure  utilization  as  RPUPS  based  on  all  Medicare  services. 

>■        Establish  performance  standards  using  the  counties  where  at  least  5  percent  of  the  group's 
patients  reside.  These  are  cumulative,  meaning  annual  increases  are  applied  to  the 
previous  target,  not  the  most  recent  actual  RPUPS.  Adjust  the  performance  standard  each 
year  for  changes  in  case  mix  from  the  base  year. 

►  Pay  successful  groups  a  lump  sum  reward  consisting  of  a  refund  for  revenues  lost  from 
national  fee  penalties,  plus  75  percent  of  the  product  of  estimated  Medicare  Savings  times 
the  Patient  Capture  Ratio. 

►  Penalize  unsuccessful  groups  only  through  any  applicable  national  fee  penalties. 


82 


REFERENCES 

Eisenberg,  JM,  Doctors  Decisions  and  the  Cost  of  Medical  Care,  Health  Administration  Press 
1986. 

Heskett,  JL,  Managing  in  the  Service  Economy,  Harvard  Business  School  (1986). 

Holahan  J,  Zuckerman  S,  "The  Future  of  Volume  Performance  Standards."  Inquiry  30:235-248 
(Fall  1993). 

Miller  RH,  Luft  HS,  "Managed  Care  Plan  Performance  Since  1980."  JAMA,  May  18, 1994  -  Vol 
271,  No.  19,  pp.  1512-1519. 

Omnibus  Budget  Reconciliation  Act  of  1 989  (OBRA). 

Physician  Payment  Review  Commission.  1990  "Annual  Report  to  Congress"  Washington,  DC. 

Physician  Payment  Review  Commission.  1992  "Fee  Update  and  Medicare  Volume  Performance 
Standards  for  1992"  Washington  DC. 

Physician  Payment  Review  Commission.  1993  "Annual  Report  to  Congress"  Washington,  DC. 

Physician  Payment  Review  Commission.  1994  "Aimual  Report  to  Congress"  Washington,  DC. 

Porell  FW,  Tompkins  CP,  "Medicare  Risk  Contracting:  Identifying  Factors  Associated  with 
Market  Exit."  Inquiry  30:157-169  (Summer  1993). 

Tompkins  CP,  Wallack  SS,  Porell  FW,  van  Reenan  C,  "Managing  Medicare  Physician  Services 
through  Volume  Performance  Standards"  Report  to  HCFA:  Institute  for  Health  Policy,  Brandeis 
University,  Waltham,  Massachusetts,  July  1992. 

Wallack  SS,  Tompkins  CP,  Porell  FW,  van  Reenan  C,  Volya  Medicare,  "An  Analysis  of  Group- 
Specific  Medicare  Volume  Performance  Standards"  Report  to  HCFA:  Institute  for  Health  Policy, 
Brandeis  University,  Waltham,  Massachusetts,  July  1991. 

Weiner,  JP,  Starfield,  BH,  Lieberman,  RN,  "Johns  Hopkins  Ambulatory  Care  Groups  (ACGs);  A 
Case-Mix  System  for  UR,  QA  and  Capitation  Adjustment."  HMO  Practice,  Vol.  6  No.  1 :  (13- 
19);  1992. 

Welch  WP,  Miller  ME,  "Analysis  of  Hospital  Medical  Staff  VPS"  Report  to  HCFA:  The  Urban 
Institute,  Washington  DC,  December  1994. 


A-1 


I,        Appendix  A:  Consultations  with  Multispecialty  Groups 
A.  IHP  Outreach  Efforts  with  Group  Practices 

Over  the  course  of  the  GVPS  research  effort,  Institute  for  Health  Policy  research  staff 
have  engaged  in  a  series  of  contacts  and  exchanges  of  information  with  a  number  of  group 
practices  across  the  U.S.  These  contacts  have  included  activities  such  as  the  following: 

IHP  presentations  at  groups'  coUoquia, 
Limited  surveying  of  groups  by  IHP, 

A  GVPS  conference  organized  by  IHP  with  group  representatives  attending, 
Conference  calls  with  group  leadership. 
Visits  to  group  sites  by  IHP. 

The  consultations  with  the  groups  have  informed  the  GVPS  research  effort,  providing  insights  on 
the  role  of  Medicare  in  group  practices,  the  organizational  capabilities  and  dynamics  of  group 
practices,  and  potential  obstacles  to  the  implementation  of  GVPS.  Because  of  explicit  and 
implicit  confidentiality  considerations,  specific  identification  in  this  appendix  of  groups  and  their 
representatives  is  limited. 

Creation  of  the  National  Advisory  Committee  on  GVPS 

A  half-dozen  group  practices  (Lahey  Clinic,  Cleveland  Clinic,  Ochsner  Clinic,  Henry 
Ford  Health  System,  Mayo  Clinic,  and  Lovelace  Clinic)  meet  on  a  regular  basis  to  discuss 
common  issues  and  challenges.  Discussions  between  Lahey  Clinic  representatives  and  IHP  staff 
about  GVPS  led  to  Lahey  extending  an  invitation  to  IHP  to  make  a  GVPS  presentation  at  a 
meeting  of  these  six  clinics.  In  addition,  the  initial  GVPS  report  (Wallack  et  al.,  1991)  generated 
interest  among  members  of  the  American  Group  Practice  Association  (AGP  A).  As  a  result, 
researchers  at  IHP  made  a  presentation  on  GVPS  at  an  AGPA  national  conference.  Lastly, 
interest  in  GVPS  among  some  additional  group  practices  grew  out  of  their  existing  relationships 
with  IHP.  Based  on  all  these  outreach  activities,  IHP  identified  a  small  set  of  providers  that  were 
interested  in  GVPS  and  willing  to  engage  in  consultations  with  IHP.  These  providers  were  then 
organized  as  the  National  Advisory  Committee  on  Multispecialty  Group  r'ractices  with  the 
following  members: 

Cleveland  Clinic  Foundation  (Cleveland,  OH) 

Fallon  Clinic  (Worcester,  MA) 

Geisinger  Clinic  (Danville,  PA) 

Henry  Ford  Health  System  (Detroit,  MI) 

Lahey  Clinic  Foundation  (Burlington,  MA) 

Lovelace  Clinic  (Albuquerque,  NM) 

Mayo  Foundation  (Rochester,  MN;  Scottsdale,  AZ;  Jacksonville,  FL) 
Ochsner  Clinic  (New  Orleans,  LA) 


A-2 


Scott  &.  White  Clinic  (Temple,  TX) 

Upper  Hudson  Primary  Care  Consortium  (Warrensburg,  NY) 

Dr.  William  Conway,  Vice-President  for  Medical  Affairs  at  Henry  Ford  Health  System,  serves  as 
committee  chairman.  The  committee  has  subsequently  been  renamed  the  National  Advisory 
Committee  on  GVPS. 

Small-Scale  Survey  of  the  Advisory  Committee 

Each  member  of  the  advisory  committee  received  in  1993  a  small  set  of  questions 
prepared  by  IHP.  The  questions  on  these  committee  response  sheets  were  designed  to  produce 
enhanced  understanding  of  each  group  practice  organization's  size  and  structure,  physician 
specialty  composition,  and  the  Medicare  component  of  total  caseload.  IHP  received  responses 
for  8  of  the  committee's  12  sites. 

The  majority  of  the  responding  sites  operate  as  non-profit  corporations.  Almost  all 
physicians  in  each  group  practice  work  full-time  at  the  practice.  The  size  of  the  physician  staff  in 
1993  ranged  from  11 J  to  995  PTEs,  with  a  mean  of  421.  Over  the  1989-91  period,  these 
physician  staffs  grew  at  each  of  the  responding  sites  (1-10%  growth).  All  of  the  groups  that 
completed  the  committee  response  sheet  deliver  a  broad  range  of  primary  and  tertiary  services, 
and  the  physician  staffs  represent  accordingly  diverse  arrays  of  specialties. 

In  1993,  each  responding  group  was  either  involved  in  contractual  relationships  with 
managed  care  organizations  or  negotiating  a  possible  relationship.  Four  groups  indicated  that 
they  were  operating  their  own  HMO.  All  of  the  groups  had  longstanding  quality  assurance 
programs  with  most  now  organized  on  the  continuous  quality  improvement  model. 

The  delivery  of  medical  services  to  Medicare  beneficiaries  represents  an  important 
component  of  each  group's  operations.  For  the  year  1991,  the  Medicare  proportion  of  total 
patient  caseload  ranged  from  1 1  to  49  percent.  Medicare  reimbursements  represented  18  to  49 
percent  of  total  group  revenues  over  the  same  period. 

1 993  Conference  on  GVPS 

IHP  organized  a  conference  on  GVPS  that  was  held  in  Boston  on  November  5,  1993. 
Representatives  for  10  of  the  12  sites  attended,  and  these  representatives  held  leadership 
positions  in  their  organizations  (chief  financial  officer,  medical  director,  chief  administrative 
officer,  etc.).  The  HCFA  project  officer  for  GVPS  also  attended,  along  with  another 
representative  from  HCFA's  Office  of  Research  and  Demonstrations.  This  conference  had  two 
main  purposes:  (1)  a  presentation  by  IHP  of  a  detailed  report  on  the  progress  to  date  in  the 
development  of  GVPS  models,  methods,  and  research;  and  (2)  a  discussion  with  group 
representatives  in  order  to  identify  potential  pitfalls  and  opportunities  in  the  development  and 
operationalization  of  GVPS. 


A-3 


The  group  representatives  were  excited  by  the  potential  of  GVPS  and  the  available 
research  findings,  such  as  the  demonstrated  ability  to  trace  a  group's  aggregate  Medicare  claims 
via  the  I.R.S.  employer  identification  number  (EIN).  They  also  expressed  a  keen  interest  in 
continuing  to  participate  in  consultations  on  the  development  of  group-specific  volume 
performance  standards.  A  series  of  conference  calls  with  leadership  at  each  site  did  ensue,  at  . 
least  partially  as  a  result  of  this  conference.  In  addition,  researchers  at  IHP  obtained  a  list  of 
issues  whose  resolution  would  serve  to  guide  the  ongoing  GVPS  effort. 

Visits  to  Advisory  Committee  Member  Sites 

During  the  course  of  1994,  IHP  researchers  made  visits  to  9  of  the  12  group  practices 
serving  on  the  advisory  committee.  Our  objectives  in  visiting  the  sites  were  two-fold: 

1.  To  detail  progress  on  the  project,  present  findings  from  data,  and  to  educate  senior  staff 
regarding  the  proposed  GVPS  models. 

2.  To  gather  information  about  the  sites  which  would  help  us  decide  how  feasible  applying  the 
various  GVPS  models  would  be  at  the  sites. 

Some  information  was  shared  between  Brandeis  and  the  sites.  The  common  goal  was  to  develop 
a  better  knowledge  base  from  which  to  operate.  We  realized  as  we  conducted  our  site  visits  that 
a  unidirectional  gathering  of  information  about  these  organizations  on  our  part  was  necessary  but 
not  sufficient  to  properly  support  the  building  and  implementation  of  GVPS  models  at 
multispecialty  groups.  Thus,  an  important  component  of  our  site  visits  became  the  educational 
process  we  undertook  in  explaining  GVPS  to  the  groups'  senior  clinical  and  administrative  staff. 
Prior  to  every  site  visit,  we  distributed  to  each  group  a  draft  document  that  explained  the 
background  of  GVPS,  and  discussed  several  models.  This  document  served  as  the  starting  point 
for  presentations  and  discussions  at  our  site  visits.  In  addition,  we  used  this  opportunity  to 
present  site-specific  findings  from  our  analysis  of  the  Medicare  database.  As  site  visits  were 
carried  on  during  a  time-frame  of  almost  a  year,  our  analyses  became  more  detailed  as  the  year 
progressed.  Therefore,  sites  which  we  visited  later  in  the  year  were  apt  to  receive  more  findings. 

All  groups  received  a  core  set  of  reports  earlier  in  the  project,  before  site  visits  were 
initiated.  This  first  round  of  reports  were  site-specific,  and  analyzed  a  site's  Medicare  beneficiary 
population  along  two  core  dimensions:  RPUPS  and  PGR  (see  Section  X).  We  followed  this  up 
with  conference  calls  with  senior  representatives  at  the  groups  to  discuss  the  implications  and 
value  of  these  data.  A  general  consensus  emerged  among  the  group  practices  that  they  would 
like  to  receive  blinded  copies  of  the  specific  data  prepared  for  all  other  sites,  and  this  anonymous 
set  of  data  was  sent  in  a  second  round  of  mailings.  We  received  positive  feedback  from  the 
groups  regarding  these  data  since  they  could  then  compare  their  own  performance  with  other 
sites.  For  sites  visited  later  in  the  year,  we  were  able  to  provide  them  with  data  regarding  their 
Medicare  patients'  utilization  of  services  (both  within  their  organization  and  external  to  it)  by 
place  of  service  and  by  specialty. 


A-4 


Groups  recognized  the  value  of  knowing  their  PGR,  since  this  measure  illustrates  the 
extent  to  which  their  Medicare  patients  are  utilizing  the  services  of  providers  outside  the 
organization.  Any  group  pursuing  a  proactive  approach  to  managing  more  of  their  patients'  care 
must  move  beyond  simply  making  services  available  in-house.  Indeed,  one  of  the  sites  had 
realized  the  importance  of  patient  satisfaction  in  increasing  patient  loyalty,  and  as  a  matter  of 
routine  performed  customer  surveys  to  determine  how  satisfied  patients  were  with  the  group's 
physicians.  The  group's  goal  was  to  identify  the  factors  responsible  for  producing  an  acceptable 
level  of  patient  satisfaction,  and  then  strategically  address  these  systemic  factors  in  order  to 
promote  patient  loyalty  (thereby  increasing  PGR). 

At  another  site,  group  leaders  admitted  that  the  need  to  manage  PGR  had  not  been 
perceived;  historically,  there  had  been  enough  FFS  volume.  Given  the  changing  envirormient, 
they  acknowledged  that  future  strategies  would  include  measures  to  shift  more  of  their  patients' 
utilization  inside  the  organization.  In  operational  terms,  it  would  mean  that  more  of  the  patient's 
needs  would  be  identified  in-house,  and  utilization  of  appropriate  services  within  the 
organization  itself  would  be  encouraged,  such  as  through  enhanced  access.  One  example 
mentioned  was  the  potential  creation  of  a  telephone  reminder  system  for  patients  with  chronic 
diseases  that  would  promote  compliance  with  their  treatment  regimens  (including  visits  and 
recommended  prevention  protocols).  Such  a  service  innovation  would  have  the  added  benefit  of 
improving  quality  of  care. 

A  quality  improvement  strategy  adopted  by  a  second  group  involved  employing  a  team 
approach  for  the  care  of  diabetics  with  each  team  led  by  an  endocrinologist.  Evaluation  of  this 
innovation  determined  that  it  had  drastically  reduced  the  need  for  hospitalization  due  to  hypo- 
and  hyper-glycemic  reactions.  In  the  context  of  GVPS,  the  group's  leaders  posited  that  the 
innovation  in  diabetic  care  had  accomplished  two  further  strategic  goals:  increased  PGR  for  the 
group's  diabetic  patients  covered  by  Medicare,  and  efficiently  contained  growth  in  RPUPS  levels 
for  these  patients. 

Discussions  with  groups  that  displayed  a  high  RPUPS  level  for  their  Medicare  patients 
centered  around  ways  that  such  organizations  could  implement  strategies  to  more  efficiently 
manage  utilization  within  the  organization.  Many  of  the  advisory  committee  group  practices  are 
already  engaged  in  executing  operating  strategies  to  streamline  the  delivery  of  care,  avoid 
duplication  of  services,  implement  clinical  pathways  and  treatment  protocols,  and  reduce 
variation  by  standardizing  care.  Again,  very  often  quality  improvement  efforts  provided  the 
impetus  for  these  strategies. 

At  one  of  the  groups,  disease  management  strategies  were  developed  and  implemented  to 
manage  the  entire  care  of  patients  with  certain  diseases.  For  example,  more  intensive 
management  of  patients  with  asthma  extended  the  use  of  outpatient  care  services  and  actually 
reduced  the  incidence  of  emergency  admissions  due  to  asthma.  Similarly,  this  site  instituted  a 
triage  system  for  female  patients  with  uncomplicated  urinary  tract  infections  that  involved  a 
detailed  questionnaire  administered  by  a  nurse  practitioner.  This  system  reduced  the  length  of 


A-5 


courses  of  treatment,  and  also  lowered  the  use  of  specialist  consultations,  cultures,  and  expensive 
antibiotics.  At  another  group,  implementation  of  a  decision  tree  for  breast  cancer  treatment 
(mammography  finding  triggering  a  therapeutic  cascade)  resulted  in  more  timely  management  in 
accordance  with  accepted  and  recommended  clinical  protocols.  According  to  the  surgeon  who 
developed  the  tree  in  conjunction  with  a  team  of  clinicians  and  administrators,  the  group  now 
provides  these  patients  with  better  outcomes  and  more  efficient  care. 

At  the  time  of  our  site  visits  we  uniformly  found  site  representatives  to  be  relatively  well- 
informed  about  project  development.  Questions  usually  arose  about  the  implications  for 
individual  sites  and  the  utility  cf  participating  in  a  GVPS  program.  At  this  point,  we  discussed 
with  group  leaders  those  elements  of  a  site's  environment,  both  internal  and  external,  that  might 
determine  the  GVPS  model  a  group  would  prefer  to  participate  under.  We  invariably  found  that 
through  this  process  of  mutual  information  exchange,  site  representatives  grew  to  appreciate  the 
opportunities  and  advantages  of  operating  under  some  model  of  GVPS. 

B.  Organizafional  Characteristics  of  Advisory  Committee  Members 

We  have  outlined  in  this  section  some  observations  regarding  the  characteristics  and 
capabilities  of  the  group  practices  we  have  consulted  and  that  are  relevant  to  GVPS. 

Organizations  and  Environments 

Most  of  the  groups  are  large  and  well-established,  and  characteristically  display  large 
patient  volumes,  organized  clinical  leadership,  and  explicit  clinical  standards.  These  factors 
provide  the  potential  to  effectively  manage  utilization  and  costs,  and  create  an  atmosphere  in 
which  GVPS  may  be  successfully  implemented.  Members  of  our  MVPS  Advisory  Committee 
are  dispersed  geographically  across  the  nation,  and  also  vary  by  setting  (rural,  urban,  or  semi- 
urban).  Most  are  located  in  major  metropolitan  areas.  In  addition,  most  of  the  member 
groups  have  a  lengthy  history  spanning  a  half  cenmry  or  more,  and  are  known  for  the  niche 
they  have  carved  out  for  themselves  in  health  care  services.  Several  of  them  have  new 
facilities  with  state-of-the-art  architecture  and  engineering,  while  some  of  them  are  in  the 
process  of  upgirading  or  adding  to  existing  strucmres.  The  majority  of  the  groups  are  non- 
profit organizations.  All  of  them  have  governing  boards  of  trustees,  and  an  executive  branch 
predominantly  made  up  of  physician  leaders.  Several  of  the  groups  novv  have  TEFRA  risk 
contracts,  or  are  actively  considering  such  arrangements.  Similarly,  every  group  is  either 
involved  in  ongoing  contracmal  relationships  with  managed  care  organizations  or  negotiating  a 
possible  relationship. 

The  external  market  environment  varies  substantially  among  advisory  committee 
groups.  Some  are  positioned  in  areas  where  there  are  several  organizations  of  comparable  size 
and  capability,  and  potential  patients  have  a  wide  choice  of  providers.  Some  are 
geographically  located  such  that  they  are  the  only  organization  with  their  capacity,  but  they  toe 
acknowledge  that  geographic  isolation  has  become  less  of  a  barrier  to  patient  drainage  from 
their  market  area  than  before.  All  the  groups  are  faced  with  an  environment  that  is  changing 


A-6 


rapidly  and  have  had  to  accommodate  trends  towards  managed  care,  mergers  and  strategic 
alliances.  Some  of  them  are  in  areas  where  purchasing  units  such  as  business  coalitions  are 
beginning  to  have  an  impact  on  health  care  service  delivery  systems  in  terms  of  accountability 
in  outcomes  and  efficiency. 

Power  and  Control 

Essentially,  the  groups  are  physician  led  and  dominated.  Physicians  function  not  only 
as  clinicians,  but  also  as  administrators,  supervisors,  and  strategic  planners.  The  role  of  lay 
managers  varies  among  advisory  committee  members.  At  some  groups,  we  have  observed 
very  solid  partnerships  and  tandem  approaches  between  clmicians  and  non-clinician  managers. 
Other  sites  have  placed  non-clinicians  in  strongly  supportive  managerial  roles.  Where  strong 
alliances  between  physicians  and  administrators  have  been  observed,  we  have  typically  seen  a 
democratic  allocation  of  power  among  the  organization's  physician  leaders.  Where  the  reverse 
is  true,  we  have  typically  observed  a  relatively  autocratic  situation.  None  of  the  groups  we 
consulted  has  assigned  any  control  over  clinical  matters  to  non-physician  managers,  other  than 
strategic  planning  for  service  mix. 

The  advisory  committee  groups  employ  three  control  methods  on  their  physicians, 
balanced  in  varying  proportions.  Bureaucratic  control  is  exerted  through  the  development  and 
implementation  of  protocols  and  guidelines,  peer  review,  monitoring,  training/education,  and 
utilization  review.  Market  control  is  exerted  through  positive  approaches  such  as  rewards  and 
incentives;  we  have  not  observed  any  groups,  at  this  point,  utilizing  negative  market 
approaches  such  as  risk-sharing  or  penalties.  Finally,  we  found  "clan"  control  can  be  a  very 
powerful  method  of  control.  At  some  groups,  there  is  a  very  strong  culture  of  membership  in 
an  elite  group  of  physicians,  and  its  implications  of  behaving  up  to  a  certain  professional  and 
personal  standard,  adhering  to  a  certain  philosophy  of  care,  and  acting  responsively  to  the 
demands  by  physician  leadership.  At  others,  we  found  less  evidence  of  a  "team  spirit." 

Service  Concept 

Traditionally,  most  of  the  groups  making  up  the  GVPS  advisory  committee  have  been 
known  for  their  specialty  care.  Several  of  them  have  national  and  international  reputations  as 
referral  centers  for  tertiary  and  quaternary  care.  Until  recently,  building  a  primary  care  base 
has  not  been  a  priority  for  such  groups.  Even  now,  efforts  to  shore  up  the  primary  care 
aspects  of  these  organizations  are  motivated  in  large  part  by  the  need  to  "feed"  their 
specialties.  Representatives  at  most  of  the  groups  expressed  the  belief  that  the  changing  health 
care  environment  may  no  longer  be  able  to  support  the  kind  of  "top-heavy"  organizations  they 
have  successfully  marketed  themselves  as  in  the  past,  in  terms  of  specialty  care. 

Similarly,  most  of  the  groups  we  consulted  have  had  a  service  concept  that  advocates 
practice  management.  Thus,  most  of  them  have  fairly  sophisticated  systems  in  place  for 
managing  the  resources  necessary  to  run  their  practices  and  controlling  the  costs  of  delivering 
specific  services.  The  need  to  manage  the  complete  patient  and  all  required  services— both  to 


A-7 


compete  in  the  marketplace  as  well  as  to  be  successful  under  Group  Volume  Performance 
Standards— is  a  relatively  novel  concept  for  these  organizations. 

We  have  received  mixed  feedback  from  the  groups  regarding  their  attimdes  towards  the 
gatekeeper  concept.  Several  groups  maintain  that  gatekeeping,  via  a  primary  care  physician 
that  restricts  access  to  specialty  care,  does  not  automatically  produce  more  efficient  care. 
They  point  out  that  speedier  access  to  specialists  may  indeed  promote  more  efficient  care  for 
more  complex  or  unusual  cases.  Physicians  at  some  groups  argue  that  for  specific  categories 
of  patients,  specialist  care  is  far  more  effective  and  efficient.  The  examples  most  commonly 
cited  are  chronic  conditions  such  as  diabetes,  ulcerative  colitis,  end-stage  renal  disease,  and 
congestive  heart  failure.  Furthermore,  many  of  the  physicians  interviewed  stressed  that  the 
ready  availability  of  specialist  referral  and  consultation  in  their  groups  actually  leads  to  more 
efficient  and  effective  patient  management  since  delays  and  missteps  in  diagnosis  and  treatment 
are  minimized. 

Given  that  GVPS  would  apply  only  to  the  Medicare  population  served  by  the  group 
practices,  there  is  concern  that  patients'  payer  class  could  inappropriately  influence  their 
access  to  care.  We  believe  that  this  is  not  likely  to  occur  for  several  reasons.  First  of  all, 
group  physicians  affirm  that  payer  class  usually  does  not  become  a  factor  in  the  clinical 
management  of  patients.  Indeed,  we  interviewed  a  number  of  physicians  who  indicated  that 
they  could  not  determine  a  patient's  insurance  coverage  from  the  medical  record;  only  clinical 
information  is  presented.  The  advisory  committee  groups  have  a  reputation  for  providing 
quality  care  that  they  would  seek  to  preserve  and  promote.  They  have  a  strong  incentive  to 
avoid  allegations  of  improperly  restricting  care.  Finally,  although  GVPS  applies  only  to  the 
Medicare  population,  other  patient  populations  served  by  the  groups  have  increasingly  come 
under  some  form  of  managed  care  umbrella. 

Operating  Strategy 

The  advisory  committee  groups  vary  considerably  in  the  extent  to  which  the  services 
they  provide  are  integrated.  All  of  the  groups,  however,  are  interested  in  reducing 
fragmentation  and  offering  a  consolidated  package  of  services  to  their  patients.  They  recognize 
that  establishing  a  solid,  widespread  primary  care  base  is  essential.  Some  groups  have  already 
achieved  this  base,  having  adopted  this  strategy  early  on,  but  most  of  them  are  in  the  process 
of  doing  so.  Strategies  to  build  primary  care  bases  have  ranged  from  acquiring  existing 
primary  care  delivery  systems,  establishing  new  ones,  hiring  new  primary  care  physicians, 
freezing  the  hiring  of  specialists,  and  training  and  deploying  primary  care  physicians  in-house. 
Most  groups  have  also  diversified  into  other  fields  such  as  home  health  and  nursing  homes. 

The  preferred  organizational  strategy  appears  to  be  to  set  up  a  system  where  several 
satellite  ambulatory  care  sites  feed  into  a  single  tertiary /quaternary  care  site.  Further,  more 
and  more  services  will  be  provided  at  the  satellite  sites.  As  an  example,  one  group  has  a 
couple  of  mobile  MRI  units  which  rotate  through  their  multiple  satellite  sites.  Most  of  the 
groups,  in  keeping  with  national  trends,  have  expanded  service  delivery  in  the  ambulatory 


A-8 


sector.  They  have  created  formal  or  informal  alliances  with  providers  covering  the  entire 
spectrum  of  health  care  services,  such  as  skilled  nursing  facilities,  rehabilitation  centers,  and 
home  health.  In  multispecialty  groups  such  as  those  making  up  the  GVPS  advisory  committee, 
patients  tend  to  remain  within  the  system  for  substantial  portions  of  their  care,  but  the  potential 
remains  for  the  groups  to  enhance  patient  outreach  in  order  to  manage  more  of  their  care 
within  their  own  systems. 

Information  Systems  and  Information  Flow 

While  all  the  groups  acknowledge  the  importance  of  state-of-the-art  information 
systems,  there  is  wide  variation  in  what  they  actually  possess  and  currently  utilize.  As  is 
typical  for  the  industry,  information  systems  are  most  developed  in  the  inpatient  arena,  and 
least  so  in  the  ambulatory  setting.  Most  of  the  groups  have  information  system  modules  such 
as  those  for  ordering  and  reporting  the  results  of  laboratory,  pharmacy,  and  radiology  tests. 
However,  few  have  completely  integrated  these  separate  modules.  With  the  exception  of  a 
pilot  project  at  one  group's  satellite  facility,  none  of  the  groups  has  a  completely  electronic 
patient  medical  record  system,  although  most  of  them  have  computerized  substantial  amounts 
of  clinical  data.  This  appears  to  be  motivated  primarily  by  billing  needs,  and  secondarily  by  a 
need  to  document  for  reasons  of  accreditation,  quality  assurance,  utilization  review,  and  risk 
management.  There  is  also  wide  variation  in  the  financial  reporting  systems  groups  have  in 
place.  Within  a  group,  we  have  even  observed  different  reporting  systems  being  used  for 
different  areas—  for  example,  in  decisions  regarding  what  constimtes  a  cost  center  versus  a 
profit  center.  None  of  the  sites  has  completely  integrated  clinical  and  financial  systems. 

The  namre  of  routine  feedback  to  physicians  also  varies  widely.  The  dominant  mode  is 
the  provision  of  utilization  data  to  the  department  head,  who  often  then  reviews  it  with  the 
individual  physicians  in  the  department.  Some  of  the  groups  do  generate  comparative  statistics 
on  crude  measures  of  physician  productivity—  number  of  patients  seen,  case-mix,  and  length 
of  stay,  etc.  It  appears  that  very  little,  if  any,  outcome  data  is  either  generated  or  disseminated 
routinely.  The  rationale  for  physician  feedback  in  most  cases  appears  to  be  financial  in  namre. 

An  associated  issue  is  the  flow  of  strategically-relevant  information  within  a  group 
practice  organization.  In  particular,  we  were  interested  in  learning  how  these  organization 
implement  internal  policies  in  response  to  external  pressures.  We  wished  to  learn  how 
information  was  received,  analyzed,  assessed,  and  transmitted  among  members  of  the 
organization.  The  manner  in  which  groups  use  objective  and  subjective  information  to 
formulate  strategy  and  develop  norms  and  policies  indicates  how  the  groups  will  function 
under  a  new  policy  such  as  GVPS.  We  found  a  fair  amount  of  variation  in  the  ways  the 
groups  process  information.  However,  the  advisory  committee  members  are  remarkably 
similar  in  the  manner  in  which  they  differentiate  between  processing  clinical  versus  non- 
clinical information.  Thus,  processing  external  information,  such  as  practice  guidelines 
developed  by  specialty  societies,  was  seen  as  a  purely  clinical  function.  Most  of  the  groups, 
report  that  clinical  information  is  internalized  and  disseminated  to  clinical  staff  pursuant  to 
staff  consensus  building  and  guideline  customization. 


A-9 


In  general,  processing  non-clinical  information  is  a  joint  exercise  between  clinician- 
administrators  and  managers,  at  a  seniority  level  that  is  consistent  with  the  projected  impact  of 
the  information.  Thus,  at  most  of  the  groups,  policies  regarding  strategic  alliances  or 
mergers,  for  example,  would  be  evaluated  and  decided  upon  at  the  organization's  senior  level. 
The  information  would  then  be  disseminated  within  the  ranks. 

Physician  Recruitment.  Reimbursement  and  Retention 

The  groups  are  remarkably  similar  in  their  culture  regarding  the  hierarchical  rank, 
status,  prerogatives  and  obligations  of  their  physicians;  although  they  can  differ  in  how  much 
physician  autonomy  is  encouraged  or  permitted.  Some  of  the  groups  are  only  now  beginning 
to  move  away  from  a  strongly  individualistic  tradition  into  a  more  administratively  controlled 
tradition. 

Most  of  the  groups  appear  to  have  no  problems  attracting  top-quality  physicians.  It  is 
unclear  whether  there  are  demogranhic  differences,  although  one  group  finds  that  it  attracts 
more  women  physicians  because  of  generous  flex-time  arrangements.  Most  group  practices 
have  close  affiliations  with  medical  schools  (one  group  has  its  own  medical  school)  and 
graduate  medical  education  programs,  and  these  ties  serve  as  one  source  for  recruiting  new 
physicians. 

The  most  common  method  of  reimbursing  physicians  in  the  groups  is  by  salary,  while 
some  mixed  a  salary  with  incentives.  None  of  the  groups  have  physician  staffs  reimbursed 
entirely  on  a  fee-for-service  basis.  We  have  observed  one  instance  where  certain  specialties  are 
being  reimbursed  a  percent  of  billings,  and  another  where  a  partial  capitation  arrangement  was 
being  gradually  phased  in  for  primary  care  providers.  There  is  variation  among  the  groups  in 
how  starting  salaries  and  raises  are  calculated.  Some  groups  use  published  ranges  of  salaries 
as  guidelines  for  various  specialties.  Others  either  reduce  or  eliminate  the  free  market 
differential  among  specialties.  In  all  groups,  seniority  is  a  factor  in  calculating  compensation. 

There  are  varying  levels  of  sophistication  in  using  productivity  as  a  factor  in 
reimbursement".  Productivity  may  be  cited  as  a  factor  in  calculating  year-end  raises  or 
bonuses, -as  are  teaching,  research,  and  administrative  and  collegial  responsibilities.  We  have 
not  observed  any  instances  of  a  withhold  on  physicians'  compensation.  A  minimal  risk- 
sharing  arrangement  was  observed  in  one  instance,  although  some  groups  have  begun  to 
initiate  risk-sharing  at  the  department  level.  Groups  vary  in  regard  to  whether  salaries  or  the 
method  of  calculating  them  are  made  public.  The  authority  to  set  salaries  also  varies  by 
group,  being  vested  alternatively  in  one  single  individual,  in  the  heads  of  departments,  or  m  an 
organization-wide  salary  committee. 

When  questioned,  most  physicians  working  at  these  groups  say  that  the  major  reason 
they  chose  to  practice  there,  in  preference  to  other  settings,  is  because  of  their  organization's 
reputation  for  providing  excellence  in  care.  Controllable  lifestyle  issues  are  also  an  important 
reason  for  choosing  to  practice  in  a  group  setting.  Physicians  in  these  multispecialty  groups 


A-10 


enjoy  greater  predictability  of  working  hours  along  with  freedom  from  administrative  and 
bureaucratic  duties  such  as  hiring  and  firing,  billing,  and  collecting.  They  cite  the  benefits  of 
having  regular  hours,  consistent  caseloads,  and  adequate  coverage.  In  addition,  many 
physicians  refer  to  t^^e  enhanced  oppormnities  for  patient  referral  and  consultation  provided  by 
a  group  practice  setting,  particularly  when  the  financial  considerations  of  the  individual 
physician  are  minimized.  Many  physicians  enjoy  the  ability  to  combine  an  active  clinical 
practice  with  applied  research  and  educational  activities  that  would  otherwise  be  infeasible. 
The  groups  largely  have  very  modern  facilities  and  equipment,  which  are  attractive  to 
physicians.  Some  physicians  cited  the  ready  availability  of  legal  and  ethical  consultation  as  a 
benefit  of  group  practice.  Group  physicians  appreciate  the  fact  that  they  do  not  need  to  make 
the  investment  necessary  when  initiating  a  private  practice. 

Most  physicians  interviewed  acknowledge  that  the  benefits  of  group  practice  come  at 
the  price  of  ceding  some  degree  of  autonomy.  The  structure  of  group  practice  facilitates 
greater  peer  regulation  and  oversight  as  compared  to  solo  practice.  We  found  that  although 
group  physicians  recognize  both  the  costs  and  benefits  of  this  diminished  autonomy  and  choose 
their  practice  settings  accordingly,  there  is  an  underlying  tension  that  occasionally  remains. 
One  issue  that  frequently  provokes  physician  discontent  is  that  most  physicians  at  our  groups 
have  little  control  over  patient  load  and  scheduling.  Salary  and  fair  reimbursement  for  effort 
is  also  a  topic  of  discussion,  and  sometimes  dissension,  that  may  arise  among  physicians  in 
group  practices.  We  have  occasionally  observed  a  dissonance  among  physicians  and 
administrators  (both  clinical  and  lay  managers)  regarding  what  constimtes  appropriate  work- 
load and  adequate  reimbursement  for  physicians.  Although  we  expect  that  some  level  of 
physician  discontent  regarding  compensation  will  always  remain,  group  leaders  believe  they 
can  and  will  move  to  alleviate  the  tensions  and  uncertainties  associated  with  this  issue. 

Use  of  Phvsician  Substimtes 

There  is  wide  variation  among  the  groups  in  the  extent  to  which  they  routinely  use 
physician  substitutes  and  extenders.  Some  groups  use  nurse  practitioners  and  physician 
assistants  extensively  in  almost  all  departments  whenever  possible,  while  others  have  only  now 
begun  to-initiate  this  process  in  a  very  limited  way.  Leaders  at  all  groups,  however,  recognize 
the  value" of  utilizing  non-physician  providers  where  appropriate.  We  received  the  unpression 
that  physician  resistance  to  the  use  of  substimtes  was  not  a  factor  affecting  then-  use  within  our 
groups.  However,  we  were  not  able  to  determine  whether  patient  resistance  was  a  factor. 

Research  and  Education 

There  is  variation  among  the  groups  with  regard  to  their  participation  in  research  and 
education  activities.  For  some,  such  efforts  constimte  major  centers  of  excellence  for  their 
organization.  Some  organizations  operate  significant  programs  for  undergraduate  and  graduate 
medical  education,  nursing  education,  and  the  training  of  other  health  care  workers.  The 
participation  of  other  groups  in  such  activities  is  limited  to  providing  facilities  for  affiliated 
educational  instimtions  to  send  their  smdents.  Similarly,  some  organizations  are 


A-11 


internationally  and  nationally  recognized  for  their  clinical  and  biomedical  research,  while 
others  are  engaged  exclusively  in  the  provision  of  direct  health  care  services. 

C.  Managing  Health  Services  Organizations  and  GVPS 

Based  upon  the  knowledge  we  gathered  from  the  site  visits  and  other  consultations  with 
the  groups  on  the  advisory  committee,  we  have  used  the  framework  developed  by  Heskett 
(1986)  to  outline  below  some  elements  of  strategic  orientation  groups  will  have  to  adopt  to 
operate  successfully  within  the  dynamics  of  Group  Volume  Performance  Standards. 

Service  Vision 

In  order  to  effectively  manage  patients'  care  under  GVPS,  Health  Services  Organizations 
(HSOs)  will  need  to  develop  a  new  strategic  service  vision  that  retains  several  features  of  both 
traditional  fee  for  service  (FFS)  practice  and  managed  care  arrangements  (MC).  For  simplicity, 
in  this  discussion  we  use  the  term  managed  care  narrowly  to  refer  only  to  HSOs  that  deliver 
services  to  an  enrolled,  capitated  population.  Of  course,  in  the  industry  managed  care  can  refer 
to  multiple  modalities  in  terms  of  financing,  risk,  and  population  served.  Under  GVPS,  HSOs 
face  the  following  situation: 

HSOs  deliver  care  to  a  non-enrolled  population  of  Medicare  beneficiaries  on  a  FFS 
basis.  These  beneficiaries  cost  Medicare  an  annual  amount  of  dollars  known  as 
Reimbursements  Per  Unique  Patient  Seen  (RPUPS).  The  proportion  of  RPUPS  accruing  to  the 
HSO  is  known  as  the  Patient  Capture  Ratio  (PGR).  A  high  RPUPS  results  from  high 
utilization  of  services  by  a  patient  population,  and  is  an  indication  of  both  case-mix  complexity 
and  the  degree  of  efficiency  and  appropriateness  in  delivering  services  to  this  population. 
Thus  RPUPS  need  to  be  decomposed  into  its  two  components:  (1)  reimbursements  for  services 
that  are  needed  and  clinically  appropriate,  and  (2)  reimbursements  for  services  that  are 
clinically  inappropriate  or  provided  at  excessive  cost,  and  are  therefore  inefficient. 

A  high  PGR  indicates  that  the  HSO  has  a  high  level  of  control  over  the  beneficiary's 
utilization  of  services.  Under  FFS,  HSOs  will  want  a  high  RPUPS,  but  PGR  may  not  be  a 
factor  as  "long  as  volume  of  patients  is  high  (number  of  beneficiaries  served).  For  example,  as 
long  as  enough  patients  are  receiving  services  so  as  to  generate  sufficient  revenue  for  the 
group,  capmring  more  of  each  individual  patient's  utilization  may  not  be  a  necessary  goal  for 
the  group.  In  contrast,  HSOs  under  MG  will  want  a  low  RPUPS  (utilization  of  services)  and 
high  PGR  is  assured  by  enrollment.  Furthermore,  increasing  the  number  of  beneficiaries 
served  under  MG  is  not  always  sought  by  HSOs  since  each  additional  beneficiary  represents  an 
unknown  risk  in  terms  of  utilization.  Under  the  GVPS  model,  HSOs  will  want  both  a  high 
RPUPS  (due  to  patient  need  and  not  inefficiency)  and  a  high  PGR.  They  will  seek  to  increase 
the  number  of  beneficiaries  served  as  well.  Table  1  summarizes  the  strategic  service  visions 
for  FFS,  MG,  and  GVPS. 


A-12 


TABLE  I:  STRATEGIC  SERVICE  VISIONS 


RPUPS 

PGR 

NUMBER  OF 
BENEFICIARIES 

Need 

Inefficiency 

FFS 

high 

high 

+/- 

high 

MC  (HMO) 

low 

low 

high 

+/- 

GYPS 

high 

low 

high 

high 

More  GYPS  advisory  committee  groups  fit  the  FFS  model  versus  the  HMO  model.  Of  those 
that  fit  the  FFS  model,  there  are  differing  degrees  of  how  well  positioned  they  are  to  enact  a 
GYPS  service  vision,  since  there  is  a  need  to  have  systems  in  place  to  ensure  efficiency  in 
managing  utilization. 


Target  Population 

Under  FFS,  it  can  be  said  that  populations  target  providers.  Studies  show  that  patients 
of  FFS  providers  tend  to  be  sicker  with  more  complex  problems,  and  need  and  utilize  more 
services.  MC  patients  tend  to  disenroU  and  in  fact  are  sometimes  encouraged  to  do  so  by  their 
HSO  when  their  condition  suggests  a  need  for  increased  levels  of  utilization.  FFS  providers 
have  financial  incentives  to  provide  services  for  sicker  patients  since  they  warrant  both  an 
increased  volume  and  intensity  of  services.  On  the  other  hand,  MC  HSOs  have  incentives  to 
target  populations  that  have  less  potential  for  high  utilization.  Under  GYPS,  HSOs  have 
incentives  to  target  high  utilizers  since  they  still  receive  FFS  reimbursements  to  treat  patients. 
Table  II  summarizes  these  concepts. 


TABLE  II:  TARGET  POPULATION  BY  RELATIVE  HEALTH  CARE  NEEDS 


FFS 

MC  (HMO) 

GYPS 

Utilization 

High 

Low 

High 

Currently,  most  of  the  groups  we  consulted  are  tertiary  care  centers  and  accordingly 
attract  patients  with  multiple  needs  and  high  service  utilization.  Those  with  more  integrated 
systems  may  also  have  a  proportion  of  patients  who  are  lower  utilizers  (for  example,  the 
groups  with  primary  care  satellites).  One  site  with  a  long  history  of  involvement  in  managed 
care  surprisingly  turned  out  to  have  patients  with  low  utilization  at  the  site  itself,  but  high 
utilization  elsewhere.  Two  other  sites  with  managed  care  experience  had  intermediate  utilizers. 
We  anticipate  that  these  profiles  of  the  groups  will  change  under  GYPS.  In  particular,  we 
expect  to  see  these  groups  increase  their  capture  ratios. 


A-13 


Service  Concept 

In  his  analysis  of  service  industries,  Heskett  (1986)  described  an  organization's  service 
concept  as  "the  way  an  organization  would  like  to  have  its  service  perceived  by  its 
customers."  Any  HSO  operating  under  GVPS  will  want  to  project  the  following  message  to 
its  Medicare  patients: 

We  are  your  source  for  high-quality  health  care.  You  are  our  patient.  We 
know  you,  both  your  medical  history  and  your  family  simation,  and  we  care 
about  you.  We  will  make  every  effort  not  only  to  speed  your  recovery  from 
illness,  but  also  to  keep  you  well  in  the  first  place. 

The  HSO  will  need  to  work  to  build  a  bond  between  the  organization  and  the  patients  it 
serves.  The  patients  must  believe  that  the  HSO  appreciates  their  condition  and  needs,  and  that 
the  HSO  is  doing  what's  best  for  them.  Establishing  this  trust  in  patients  is  crucial  for  HSOs 
to  succeed  under  GVPS.  After  all,  the  patients  are  free  to  seek  services  from  any  provider  in 
the  United  States.  If  a  physician  at  an  HSO  tells  a  patient  that  a  particular  test  or  procedure  is 
not  necessary,  there  are  no  rules  or  payment  restrictions  in  place  (unlike  HMOs)  to  prevent 
the  patient  from  obtaining  that  service  elsewhere.  Therefore,  effective  control  of  utilization 
under  GVPS  requires  patients  to  believe  that  their  HSO  will  provide  them  with  the  services 
they  need,  at  a  high  level  of  quality  .  Trust  is  also  needed  to  convince  the  patient  who  feels 
fine  that  undergoing  a  certain  test  today  (e.g,  mammography)  could  avoid  more  serious 
complications  down  the  road.  The  patient  and  HSO  should  be  in  a  long-term  relationship  that 
promotes  wellness,  rather  than  only  an  episodic  relationship  that  treats  acute  illnesses. 

Operating  Strategy  and  Service  Delivery  System 

An  HSO  must  have  an  operating  strategy  designed  to  achieve  its  service  concept. 
Prioritizing  of  decisions  regarding  operations,  financing,  marketing,  human  resources,  and 
control  is  essential.  The  HSO  that  is  successful  under  GVPS  has  deployed  its  resources  so  that 
strong  bonds  have  grown  between  the  organization  and  the  patients  it  serves.  Accordingly,  the 
HSO  must  strategically  focus  on  attaining  the  following  objectives  in  its  operations: 

(1-)  Patients  must  have  timely  access  to  services.  Since  the  patients  under  GVPS 
have  free  choice  of  providers,  the  HSO  must  have  adequate  capacity  and  points  of 
contact  so  that  patients  can  have  their  health  concerns  dealt  with  promptly.  Otherwise, 
they  will  go  elsewhere  for  treatment. 

(2)  Patients  must  have  ready  access  to  HSO  facilities.  As  noted  above,  many  HSOs  are 
pursuing  strategies  whereby  a  central  tertiary /quaternary  care  facility  is  linked  to 
multiple  satellite  facilities.  The  satellite  facilities  themselves  are  an  improved  access 
route  for  patients,  but  the  HSO  must  not  overlook  the  difficulties  faced  by  patients  in 
traveling  to  the  central  site  when  medically  necessary.  Of  course,  many  elderly  and 
disabled  patients  have  general  transportation  problems  that  should  be  kept  in  mind, 
including  such  matters  as  facility  design  and  layout. 


A-14 


(3)  The  HSO  must  be  devoted  to  providing  the  highest  quahty  care  possible.  Trust 
between  patient  and  provider  cannot  survive  and  grow  if  there  are  patient  doubts  about 
the  quality  of  care  provided. 

(4)  HSO  physicians  and  other  personnel  must  be  both  clinically  competent  and 
motivated  to  provide  that  "extra  effort"  in  caring  for  patients.  Excellent  clinical 
judgment  and  skill  is  a  necessary  starting  point,  but  those  providing  care  at  the  HSO 
must  remember  that  patient  loyalty  has  to  be  earned. 

(5)  In  treating  patients  under  GVPS,  the  HSO  must  pursue  a  strategy  of  aggressive 
patient  outreach  and  disease  management.  The  HSO  cannot  wait  for  patients  to  present 
themselves  for  treatment  of  acute  episodes.  Instead,  the  HSO  should  have  enhanced 
contact  and  communication  with  patients  in  order  to  foster  compliance  with  treatment 
regimens  and  head  off  the  development  of  more  serious  problems.  Patients  should 
have  regular  points  of  contact  with  the  HSO  so  that  they  do  not  become  lost  in  the 
"system." 

Putting  these  strategic  operating  objectives  (and  others)  into  practice  is  obviously  a  challenging 
prospect  for  HSOs.  However,  we  have  found  in  our  consultations  with  group  practices  that 
these  groups  are  often  already  focused  on  such  objectives,  typically  as  a  result  of  their  ongoing 
managed  care  activities. 

Realization  of  operating  strategies  is  dependent  on  the  structure  of  the  HSO's  service 
delivery  system.  The  service  delivery  system  represents  how  the  organization  has  decided  to 
deploy  its  resources  in  order  to  achieve  its  objectives.  Since  clinical  staff  are  so  essential  in 
health  care,  the  HSO  must  have  in  place  high-quality  clinical  staff,  along  with  sufficient 
training  resources  to  maintain  their  skills.  Moreover,  clinicians  must  have  the  right  tools 
available  to  effectively  manage  the  care  of  patients  under  GVPS.  For  example,  information 
technology  to  support  computerized  medical  records,  test  ordering,  and  prescribing  of 
medications  must  be  in  place  so  that  physicians  can  make  the  right  treatment  decisions  for  their 
patients  in  a  cost-effective  manner.  Information  links  between  an  HSOs  multiple  sites  are 
essential.-  In  addition,  such  technology  can  facilitate  patient  scheduling  and 
monitoring/outreach  activities. 

The  HSOs  facilities  should  not  only  have  state-of-the-art  medical  technology,  but  also 
be  designed  to  be  user-friendly.  This  is  particularly  important  for  the  elderly  and  disabled 
population:  the  necessary  wheelchair  ramps,  elevators,  signage,  etc.  must  be  in  place.  Ground 
transportation  to  both  satellite  and  central  facilities  must  be  readily  available  and  easy  to  use. 

Lastly,  a  successftil  HSO  under  GVPS  will  be  devoted  to  continuous  quality 
improvement  (CQI)  and  process  re-engineering.  Clinical  and  administrative  staff  in  the  HSO 
must  view  their  participation  in  such  activities  as  a  vital  part  of  their  jobs.  This  includes 
efforts  to  devise,  implement,  and  monitor  practice  guidelines  and  clinical  protocols.  CQI 


A-15 


activities  put  in  place  monitoring -systems  that  can  identify  system  bottlenecks  and  capacity 
restraints.  Re-engineering  puts  the  HSO  in  the  mode  of  always  re-examining  the 
organization's  operations  to  unprove  effectiveness  and  efficiency.  Control  of  quality  and  cost 
is  essential. 

Again,  the  groups  that  we  have  consulted  are  well  aware  of  the  strategic  planning  and 
implementation  requirements  for  operating  the  kind  of  efficient  and  effective  health  care 
delivery  system  needed  under  GVPS,  and  several  of  them  are  industry  leaders  in  such 
innovations. 


B-1 


I.        Appendix  B:  Data 


A.  Main  Sites 


A  Group  Volume  Performance  Standards  program  must  judge  and  reward  participating 
Medicare  providers  on  the  basis  of  their  efforts,  and  not  because  they  are  beneficiaries  of  a 
fortunate  patient  draw.  Therefore,  enrollment  in  the  program  must  be  predicated  on  certain 
requirements  in  terms  of  structure,  organization,  and  size.  The  efficiencies  under  GVPS  should 
be  achieved  through  effectively  managed  care,  not  through  favorable  selection  or  concentration 
in  a  narrow  range  of  specialtip"?.  As  a  result,  each  participating  provider  group  may  be  required 
to  have  a  certain  range  in  terms  of  physician  specialties  and  vertical  integration  of  its  services. 
Presence  of  utilization  review  and  quality  assurance  programs  and  other  features  associated  with 
managed  care  may  also  be  prerequisite.  Finally,  selected  sites  must  be  large  enough  to  generate 
reliable  and  stable  RPUPS. 

This  research  project  has  examined  in  detail  twelve  large  physician  group  practices,  all 
meeting  the  prerequisite  organizational  qualifications  and  all  large  enough  to  likely  have  the 
requisite  stability  in  their  RPUPS  values.  As  members  of  the  project's  National  Advisory 
Committee  on  GVPS,  these  sites  consented  to  have  their  records  reviewed  and  analyzed  for  this 
project,  and  also  offered  help  in  putting  in  perspective  the  results  of  our  quantitative  efforts. 
These  sites,  in  alphabetical  order,  are  as  follows: 

•  Cleveland  Clinic  Foundation  (Cleveland,  OH) 

•  Fallon  Clinic  (Worcester,  MA) 

•  Geisinger  Clinic  (Danville,  PA) 

•  Henry  Ford  Health  System  (Detroit,  MI) 

•  Lahey  Clinic  Foundation  (Burlington,  MA) 

•  Lovelace  Clinic  (Albuquerque,  NM) 

•  Mayo  Foundation  (Rochester,  MN;  Scottsdale,  AZ;  Jacksonville,  FL) 

•  Ochsner  Clinic  (New  Orleans,  LA) 
•.  Scott  &  White  Clinic  (Temple,  TX) 

••  Upper  Hudson  Primary  Care  Consortium  (Warrensburg,  NY) 

Data  used  in  our  analyses  were  obtained  from  the  Medicare  National  Claims  History  file 
(NCH),  the  relational  database  maintained  by  the  HCFA  Data  Center  (HDC)  which  brings 
together  the  Medicare  service  records  of  all  types  which  once  had  to  be  kept  in  separate  files. 
Service  types  include  the  following  sources  of  claims: 


•  Hospital  inpatient  facilities; 

•  Outpatient  department  facilities; 

•  Skilled  Nursing  Facilities  (SNFs); 

•  Hospices; 

•  Home  health  agencies; 


B-2 


•  Ambulatoiy  Surgical  Centers  (ASCs); 

•  Physicians  and  other  professionals; 

•  Suppliers. 

Identification  of  patients  at  each  study  site  is  made  possible  through  the  use  of  the 
PROVTAX  variable  in  the  NCR's  Physician/Supplier  Part  B  file  (representing  the  employer 
identification  number  or  EIN),  Although  not  required  by  HCFA  for  reimbursement,  this  field  is 
completed  for  over  95  percent  of  submitted  Medicare  claims.  By  using  PROVTAX  as  a  marker, 
we  can  also  determine  the  physicians  (identified  by  their  unique  physician  identifying  numbers 
or  UPINS)  and  physician  specialties  represented  at  each  site. 

B.  Other  GVPS  Candidates  ' 

Although  only  our  twelve  main  sites  have  expressed  their  interest  in  participating  in  a 
demonstration,  it  is  our  expectation  that  HCFA  would  be  interested  in  similar  analyses  of  other 
providers  as  well.  To  add  further  perspective  to  our  analyses,  we  sought  to  identify  other 
multispecialty  providers  within  our  mkin  sites'  catchment  areas  for  whom  volume  performance 
could  also  be  measured.  It  should  be  remembered  that  these  other  group  practices  represent 
additional  individual  examples,  In  no  way  should  they  be  considered  to  form  a  comparison 
group  or  a  set  of  controls.  Nor  should  their  behavior  be  interpreted  as  average  or  representative 
for  the  local  area. 

Identification  of  "Other  GVPS  candidates  was  based  on  witliin-state  data  from  the 
Physician/Supplier  Part  B  file  of  the  NHC  database.  Again,  assignment  of  patient  to  provider 
was  facilitated  by  the  file's  PROVTAX  variable  (representing  the  provider  Employer 
Identification  Number  or  BIN).  Within-state  files  were  employed  in  this  step  because  we 
required  a  number  of  passes  through  the  database.  Within  the  NCH  database,  a  pass  through  a 
state  file  can  usually  be  accomplished  overnight,  while  a  national-based  pass  can  have  as  much 
as  a  thirty-day  turnaround  time.  In  using  only  the  state  files,  we  made  the  assumption  that  large 
multispecialty  group  practices  were  identifiable  from  the  volume  and  types  of  services  they 
supplied  to  within-£.ate  patients.  Even  a  clinic  with  a  large  out-of-state  clientele  would  reveal  its 
multispecialty  group  practice  structure  when  services  provided  to  local  patients  were  exammed. 

The  first  pass  tlu'ough  each  state  file  identified  the  catchment  area  for  the  main  sites  in  the 
state.  A  site's  catchment  area  was  defined  as  the  union  of  all  three-digit  zip  code  areas  from 
which  the  site  enrolled  at  least  5%  of  its  within-state  patient  load,  Maps  of  each  site's  catchment 
areas  are  provided  at  the  end  of  this  appendix.  In  the  second  pass,  all  EINs  with  patients  in  the 
catchment  areas  were  identified,  and  in  a  third  pass  all  Part  B  claims  were  collected  and  matched 
to  the  proper  BIN.  By  examining  EI>f-level  frequency  distributions  for  number  of  patients, 
number  of  Unique  Physician  Identification  Numbers  (UPINS),  and  number  of  physician 
specialties,  we  developed  descriptions  of  the  size  and  composition  of  each  EIN's  practice.  We 
then  individually  handpicked  extra  sites  for  our  study.  To  be  selected  a  site  needed  thousands  of 
within-state  patients,  hundreds  of  UPINs,  and  a  physician  specialty  list  with  either  a  good 


B-3 


representation  of  specific  primaryxare  physician  specialties  (e.g.,  family  medicine,  internal 
medicine,  OBGYN),  or  had  "multispecialty"  itself  listed  as  the  most  frequent  specialty.  Up  to  a 
total  often  GVPS  candidates  per  catchment  area  were  selected  for  study. 

C.  Sample  of  Random  Providers 

The  providers  described  thus  far  are  all  large  multispecialty  group  practices  ostensibly 
possessing  the  structural  and  organizational  advantages  to  bring  certain  efficiencies  to  their 
delivery  of  services.  To  facilitate  comparisons  to  "average  practices"  within  the  catchment  areas 
of  our  GVPS  sites,  we  also  selected  a  number  of  random  providers.  Sufficient  physician  groups 
were  selected  randomly  from  each  catchment  area  to  generate  an  associated  total  patient 
enrollment  of  at  least  three  thousand  users  of  services  per  area.  Among  the  providers  selected  in 
this  step  were  large  single  specialty  groups,  smaller  multispecialty  and  single-specialty  groups, 
and  even  some  solo  practitioners.  Because  a  weighting  scheme  based  on  annual  patient  load 
was  employed,  practices  in  the  first  category  were  far  more  likely  to  be  chosen  than  those  in  the 
last.  We  have  reserved  this  provider  sample  for  future  work. 

D.  Sample  of  Random  Beneficiaries 

For  each  study  year  (1991-1993)  one  hundred  percent  of  the  patients  of  the  providers  in 
our  study  (i.e.,  main  sites  and  other  large  providers)  were  used  in  the  calculations  of  RPUPS  for 
each  site.  To  examine  further  the  possible  differences  among  main  sites  in  terms  of  measures  of 
volume  and  intensity  relative  to  their  market  areas,  we  also  constructed  random  samples  of 
patients  within  each  locality.  In  each  main  site's  catchment  area,  we  selected  a  random  sample 
of  beneficiaries  of  between  fifteen  and  twenty-five  thousand  individuals.  Each  sample 
represented  one  to  five  percent  of  all  beneficiaries  in  an  area  and  were  generated  on  the  basis  of 
the  last  two  digits  of  beneficiaries'  HICAN  identifiers,  under  the  assumption  that  such  numbers 
are  randomly  assigned. 

E.  RPUPS  Calculation 

At  the  foundation  of  this  project's  quantitative  analysis  was  the  calculation  of  each  study 
site's  reimbursement  per  unique  patient  seen  (RPUPS).  For  each  site  two  such  RPUPS  measures 
had  to  be  computed,  one  based  on  Part  B  physician  and  supplier  services  (but  regardless  of 
physician  provider),  and  the  other  based  on  all  Medicare-covered  services  (again,  regardless  of 
provider).  The  calculations  and  construction  of  datasets  used  for  the  rest  of  our  quantitative 
analyses  required  two  passes  through  the  six  files  making  up  the  fifth  leg  of  the  NHC  database. 
In  the  first  pass  the  above  described  EIN  lists  were  used  as  finder  files  to  identify  the  patients  of 
each  EIN.  The  original  output  of  such  runs  were  HICAN  lists,  but  we  recognized  that  Medicare 
patients  can  be  assigned  more  than  one  HICAN  and  these  output  lists  were  sent  through  HDC's 
EBW  Workbench  to  be  unduplicated  and  reduced.  This  unduplicating  process  reduced  patient 
counts  at  our  sites  by  approximately  10  to  15  percent.  Next,  using  the  edited  HICAN  lists  as 
finder  files,  a  second  pass  through  all  NCH  files  was  made  in  order  to  collect  and  aggregate 


B-4 


claim  amounts  for  patients  of  each  EIN.  Only  claims  from  providers  in  the  Part  B  file  were  used 
in  the  computation  of  the  RPUPS  for  physician  and  supplier  services.  Institutional  claim 
amounts  from  five  other  files  (representing  Part  A  claims  and  Part  B  outpatient  and  facility 
claims)  were  added  in  to  compute  RPUPS  for  all  Medicare-covered  services. 

In  generating  RPUPS  based  on  all  Medicare-covered  services,  we  computed  separately 
the  sum  of  the  "pass-through"  reimbursement  (calculated  as  a  state-based  per  diem  times  the 
length  of  the  visit)  and  the  reimbursement  for  organ  transplant.  These  two  amounts  are  not 
included  as  part  of  the  recorded  claim  amount  but  are  part  of  total  Medicare  services.  Other 
reimbursements  separately  noted  in  the  Part  A  files,  such  as  for  medical  education  and  capital 
improvements,  are  already  included  in  the  claim  amount  field  of  the  files. 

F.  Claims  Records 

For  this  study  one  hundred  percent  of  service  claims  records  of  selected  beneficiaries 
were  accessed  from  the  National  Claims  History  file.  Variables  contained  within  these  records 
include: 

For  the  patient: 

•  Medicare  Health  Insurance  Claim,  which  uniquely  identifies  the  patient;' 

•  Beneficiary  residence  ZIP  Code; 

•  Sex; 

•  Birth  date; 

•  Reason  for  entitlement  (aged,  disabled,  ESRD); 

For  the  provider:  , 

•  Provider  type  (physician,  supplier,  solo,  group,  etc.); 

•  Provider  ZIP  Code; 

•  Provider  Tax  Number  (EIN); 
Performing  provider  UPIN; 

•  Referring  provider  UPIN; 

•  Provider  specialty; 

For  the  service: 

•  Procedure  codes  and  modifiers; 

•  Date  of  service; 


^This  includes  the  Beneficiary  Identification  Code  which  identified  the  relationship  between  the  individual 
patient  and  the  primary  beneficiary. 


Place  of  service; 

Type  of  service  (medical  care,  surgery,  consultation,  etc.); 
Diagnosis; 

Medicare  reimbursement  amount 


B-6 


B-7 


THREE-DIGIT  ZIP  CODE  MAP  : 
MASSACHUSETTS  : 

I 

i 


B-8 


THREE-DIGIT  ZIP  CODE  MAP 
MICHIGAN 


B-10 


THREE-DIGIT  ZIP  CODE  MAP 
NEW  MEXICO 


865 

(AZ  OFFICES) 


i 


B-U 


B-12 


THREE-DIGIT  ZIP  CODE  MAP 
PENNSYLVANIA 


B-13 


THREE-DIGIT  ZIP  CODE  MAP 


TEXAS 


B-  15 


THREE-DIGIT  ZIP  CODE  MAP 
FLORIDA 


■    315  (GA  OFFICES) 


I.        Appendix  C:  Alternative  Model  Specifications 

This  appendix  discusses  potential  modifications  to  the  definition  of  RPUPS  for  a  group 
operating  under  GVPS.  HCFA  could  define  RPUPS  to  exclude  some  beneficiaries  seen  by  the 
group,  exclude  some  reimbursements  for  beneficiaries  counted  in  RPUPS,  and/or  account  for 
patients'  relative  health  status. 

A.   Excluding  Some  Beneficiaries  From  RPUPS 

Starting  with  the  population  of  beneficiaries  seen  by  a  provider  during  a  year,  it  may  be 
desirable  to  exclude  some  from  calculations  of  RPUPS.  Possible  reasons  for  excluding  some 
beneficiaries  include: 

•  Enhanced  stability  of  RPUPS  over  time; 

•  Reduced  provider  gaming  potential; 

•  Closer  alignment  of  the  performance  standard  with  a  provider's  influence  over  patient 
care. 

A  straightforward  basis  for  excluding  beneficiaries  would  be  a  minimum  threshold  for 
reimbursements  to  the  physician  group.  With  this  approach,  beneficiaries  who  have  minimal 
contact  with  the  provider  (e.g.,  $120  or  less  in  reimbursements)  would  be  excluded  altogether 
from  the  group's  RPUPS  measure.  Inclusion  of  beneficiaries  with  low  reimbursements  to  the 
group  does  not  necessarily  cause  problems  because  the  definition  of  RPUPS  in  the  performance 
year  would  be  identical  to  RPUPS  in  the  base  year.  Accordingly,  outside  utilization  occurring  in 
the  base  year  would  be  expected  implicitly  in  the  volume  performance  standard. 

Nevertheless,  there  could  be  other  reasons  for  excluding  the  beneficiaries  with  the  lowest 
reimbursements  to  the  group.  GVPS  is  intended  to  address  efficiency  in  terms  of  patient 
management,  which  includes  exercising  influence  over  patients'  use  of  other  providers.  In  the 
case  of  beneficiaries  with  high  reimbursement  totals,  almost  all  of  which  are  to  other  providers, 
the  concept  of  patient  management  is  likely  to  be  the  most  tenuous.  Reasons  for  minimal  contact 
with  a  single  provider  could  be  a  flu  shot,  a  single  consultation,  reading  of  lab  results,  etc' 
Including  these  beneficiaries  in  the  value  of  RPUPS  could  obscure  the  success  of  efforts  to 
manage  patients  more  closely  associated  with  the  group's  practice. 

Moreover,  beneficiaries  with  very  low  reimbursements  to  the  provider  would  constitute  a 
"full"  person  in  the  denominator  of  the  volume  measure.  Thus,  yearly  differences  in  the 
proportion  of  such  "drop-in  patients"  might  cause  variations  in  the  value  of  RPUPS  for  a  group. 
Excluding  the  lowest  cost  beneficiaries  also  could  reduce  the  advantage  to  a  provider  of 


'  Grounds  for  exclusion  could  be  based  on  type  of  service  as  well.  For  example,  a  beneficiary  could  be 
excluded  if  the  only  services  utilized  at  that  provider  were  related  to  lab  services. 


c-2 


increasing  their  proportional  representation  in  RPUPS.  A  systematic  increase  in  the  fraction  of 
low  cost  patients  would  tend  to  decrease  the  value  of  RPUPS,  possibly  giving  an  incorr'^ct 
appearance  of  increasing  efficiency.^ 

Finally,  beneficiaries  with  low  reimbursement  totals  across  all  providers  need  not  be  the 
focus  of  special  policies  for  aggregate  expenditure  control.  Omitting  them  from  the  measure  of 
volume  and  intensity  is  therefore  not  considered  a  substantial  problem. 

Figures  C-1  and  C-2  show  the  effects  of  removing  beneficiaries  with  less  than  $120  for 
the  78  sample  providers  described  in  Appendix  B.  Figure  C-1  shows  the  percentage  decrease  in 
patients  from  excluding  beneficiaries  with  less  than  the  minimum  reimbursement  threshold.  The 
average  number  of  beneficiaries  decreases  by  53  percent,  to  about  7,000.  Because  some  of  the 
excluded  beneficiaries  have  low  total  reimbursements  to  all  providers,  and  some  have  high  totals, 
the  effect  on  RPUPS  could  vary  across  providers.  The  average  Patient  Capture  Ratio  for  each 
provider  increases  from  18  percent  to  25  percent.  Results  for  the  sample  providers  are  shown  in 
Figure  C-2. 

We  illustrated  this  option  with  the  $120  threshold.  In  a  real  system,  the  threshold  could 
be  a  multiple  of  the  conversion  factor  used  that  year  for  most  physician  visits.  The  threshold 
level  might  be  chosen  to  achieve  two  objectives:  i)  a  suitably  low  proportion  of  patients  with 
high  reimbursements  outside  and  very  low  reimbursements  inside  the  group;  or  ii)  a  suitably 
high  average  pafient  capture  ratio.  The  dollar  threshold  could  be  adjusted  each  year  to  reflect 
changes  in  the  conversion  factor  under  the  MFS. 

B.   Excluding  Some  Reimbursements  From  RPUPS 

The  definition  of  RPUPS  also  can  be  varied  by  excluding  some  categories  of 
reimbursements,  even  though  the  beneficiary  continues  to  be  counted.  The  main  reason  for 
excluding  some  reimbursements  would  be  to  enhance  statistical  reliability  of  RPUPS. 
Accordingly,  we  give  most  consideration  to  excluding  reimbursements  in  excess  of  individual 
outlier  thresholds. 

Although  not  tested  by  us  empirically,  there  could  be  other  circumstances  in  which  some 
reimbursements  are  excluded  from  RPUPS.  For  example,  it  may  be  desirable  to  exclude 
reimbursements  during  the  first  year  of  Medicare  coverage  for  very  expensive  and  rare  services. 
At  the  provider  level,  some  services  may  be  excluded,  such  as  those  emanating  from  a  new 
department.  For  example,  a  provider  that  opens  or  acquires  a  new  oncology  center  may  suddenly 
treat  a  different  category  of  patient.  Services  delivered  in  the  new  center  may  be  omitted  from 
RPUPS  during  the  performance  year  until  the  utilization  experience  of  the  new  center  has  been 
factored  into  the  baseline  RPUPS,  and  thereafter  the  target. 


^  This  tendency  also  is  addressed  in  the  case-mix  adjustments,  discussed  later. 


c-3 


Other  reimbursements  that  could  be  excluded  are  for  services  that  occur  before  the 
beneficiary's  first  visit  in  the  year  to  the  group.  Arguably,  a  provider  has  little  chance  to  manage 
or  influence  utilization  that  occurs  before  initial  contact  with  the  patient.  A  variation  on  this 
approach  would  include  these  reimbursements  anyway,  //the  beneficiary  was  seen  by  the 
provider  in  the  previous  year.  This  option  would  be  easier  to  administer  since  it  would  not 
require  going  back  through  the  files  to  access  service  data.  The  applicable  service  bills  for 
patients  of  GVPS  sites  could  be  tapped  on  the  fly  as  they  are  received,  because  lists  of  relevant 
beneficiaries  for  such  sites  would  always  be  up-to-date. 

Generally  for  a  populafion,  most  reimbursements  are  paid  on  behalf  of  a  small  fraction  of 
patients.  The  measure  of  average  reimbursements  per  pafient  (i.e.,  RPUPS)  could  be  distorted  by 
a  variafion  in  the  proportion  of  high  cost  cases  during  a  particular  year.  Thus,  it  may  be  useful  to 
exclude  or  to  discount  reimbursements  for  individual  beneficiaries  that  are  in  excess  of  a 
specified  threshold.  This  is  somewhat  like  stop-loss  reinsurance  mechanisms  that  shield  primary 
insurers  from  excessive  risks  due  to  uncontrollable  factors,  but  its  main  purpose  here  would  De  to 
enhance  stability  in  measurement.  To  a  certain  extent,  health  status  risk  adjusters  could 
compensate  for  changes  in  the  incidence  of  high  cost  patients.  However,  this  aspect  of  the  model 
is  intended  to  dampen  stochastic  effects  on  the  measure  of  total  RPUPS  for  each  group. 

Because  fee-for-service  payments  would  be  made  for  all  covered  services,  including 
when  reimbursements  are  in  excess  of  this  threshold,  there  is  a  potential  problem  in  that  some 
actual  reimbursements  would  be  ignored  or  discounted  when  measuring  the  savings  to  Medicare 
under  the  GVPS.  In  other  words,  the  level  of  true  savings  depends  on  reimbursements  above  the 
threshold  as  well  as  below  the  threshold.  However,  with  reinsurance  thresholds  in  place  there  is 
an  equivalent  problem  that  reimbursements  to  the  site  above  the  threshold  in  the  base  year  would 
be  ignored  when  setting  the  target.  In  any  event,  true  savings  should  be  measured  using 
performance  standards  and  observed  levels  that  are  not  substantially  altered  by  stochastic  error. 
Thus,  we  explore  the  empirical  question  of  whether  model  performance  improves  with  high  cost 
thresholds. 

There  are  two  potential  approaches  to  setting  threshold  values.  First,  an  absolute  dollar 
amount  can  be  specified,  such  as  $10,000.  Reimbursements  for  any  beneficiary  in  excess  of 
$10,000  would  be  discounted  or  not  counted  when  calculating  the  provider's  average 
reimbursements  per  patient.  Second,  an  amount  can  be  specified  for  a  given  provider  that 
depends  on  the  distribufion  of  reimbursements  for  that  provider's  patients.  Providers  seeing 
patients  with  higher  average  reimbursements  could  have  higher  thresholds  than  other  providers. 
Choosing  threshold  values  would  depend  on  the  mean  and  variance  of  reimbursements  per 
patient.  We  tested  only  constant  absolute  dollar  values  for  all  providers. 

In  order  to  study  the  impact  of  a  high  cost  threshold,  we  chose  for  this  report  the  simpler 
approach  of  merely  ignoring  all  reimbursements  in  excess  of  $1.0,000  for  physician  and  supplier 
services,  or  $30,000  for  all  Medicare  services.  The  $10,000  threshold  affected  approximately  the 


c-4 


top  2%  of  beneficiaries  chosen  in  the  overall  sample,  and  the  $30,000  threshold  affected  about  4 
to  5%  of  beneficiaries. 

We  chose  to  truncate  the  reimbursements  over  the  threshold  in  order  to  illustrate  the 
potential  of  this  approach  to  reduce  variability.  However,  reimbursements  for  any  Medicare 
beneficiary  in  excess  of  the  specified  threshold  could  be  discounted  by  some  amount,  such  as  50 
percent.  Each  dollar  of  reimbursements  (to  all  providers)  for  a  beneficiary  in  that  category  in 
excess  of  the  threshold  would  count  as  50  cents  in  the  RPUPS.  This  option  may  be  desirable 
since  cost  consciousness,  albeit  at  a  reduced  level,  would  apply  to  all  services.  Because  the  same 
rules  apply  for  setting  the  target  as  measuring  outcomes,  the  diminishing  effect  of  the  thresholds 
on  mean  values  is  counterbalanced. 

C.   Health  Status  Risk  Adjusters 

The  measure  "Reimbursements  Per  Unique  Patient  Seen"  reflects  the  mix  of  patients  seen 
by  the  group.  Changes  over  time  in  case  mix  might  be  large  enough  to  diminish  the  validity  of 
comparisons  between  actual  and  target  rates  in  the  performance  year.  If  so,  it  would  be 
important  to  adjust  either  the  target  or  observed  RPUPS  in  order  to  standardize  the  health  status 
distributions. 

The  relative  health  status  of  each  patient  can  be  described  in  terms  of  risk  classification 
systems.  This  study  uses  a  two-tiered  classification  system,  such  that: 

•         Beneficiaries  were  first  categorized  hierarchically  by  Reason  for  Entitlement  to 

Medicare:  ESRD,  Disabled,  Aged.  A  person  with  any  claim  during  the  year  indicating 
ESRD  entitlement  was  categorized  as  'ESRD'  for  that  year.  Remaining  beneficiaries 
with  any  claims  indicating  Disabled  status  were  categorized  as  'Disabled'  for  that  year. 
All  others  were  categorized  as  'Aged'  for  that  year. 

Aged  and  Disabled  beneficiaries  were  categorized  by  ACG.  This  system  classifies 
pafients  into  one  of  5 1  categories  based  on  all  of  the  diagnoses  observed  for  medical 
service  claims  during  the  year  (Weiner,  1992).^  Table  C-1  show^  a  list  of  the  patient 
categories  defined  by  that  system. 

A  brief  description  of  the  ACG  methods  is  offered  here.  The  Johns  Hopkins  Ambulatory 
Care  Group  System  (ACGs)  is  a  case-mix  system  for  categorizing  patients  based  on  their  age, 
gender,  and  ICD-9-CM  codes  presented  in  claims  over  a  given  time  period  (typically  one  year). 
Initially,  over  6,000  ICD-9-CM  diagnostic  codes  are  assigned  to  one  of  34  clusters  known  as 
Ambulatory  Diagnostic  Groups  (ADGs).  A  patient  may  be  simultaneously  placed  into  anywhere 


^  We  basically  took  the  current  version  of  the  ACG  system  "off  the  shelf."  Later  versions  of  ACGs,  or 
entirely  different  classification  systems,  could  be  substituted. 


c-5 


from  1  to  34  ADGs.  Those  ADGs  that  are  similar  in  regard  to  persistence  or  recurrence  of  the 
diagnoses  contained  in  them  are  then  collapsed  into  twelve  categories  known  as  Collapsed  ADGs 
(CADGs).  Next,  Patients  are  assigned  to  clinically  logical  and  mutually  exclusive  groupings 
known  as  Major  Ambulatory  Categories  (MACs).  Finally,  statistical  variance  tet  jiiques  are 
used  to  split  MACs  into  5 1  mutually  exclusive  ACGs  based  on  age,  gender,  and  combination  of 
ADGs. 

Depending  on  the  data  available  and  also  the  research  goals  of  ACG  patient 
classification,  the  range  of  ICD-9-CM  diagnosis  codes  extracted  from  patients  claims  for 
inclusion  in  the  ACG  grouper  algorithm  can  vary.  We  used  all  ICD-9-CM  diagnosis  codes  (both 
inpatient  and  outpatient)  recorded  on  Medicare  claims  to  place  beneficiaries  in  annual  ACG 
categories.'' 

The  mean  reimbursements  per  patient  within  each  cell  were  determined.  The  ratio  of  the 
mean  dollars  for  each  cell  to  the  total  RPUPS  for  the  provider  constitutes  the  relative  average 
reimbursements  for  beneficiaries  in  the  cell.  For  any  base  year,  there  will  be  a  c°  tain 
distribution  of  patients  across  the  cells,  and  the  weighted  average  of  the  mean  dollar  amounts  for 
each  cell  is  the  value  of  RPUPS  for  the  provider. 

Figures  C-3  through  C-5  show  the  proportion  of  patients  and  reimbursements  per  cell  in 
1992  for  one  multispecialty  physician  group.  The  patient  population  seen  by  that  provider  in 
1992  was  categorized  hierarchically  according  to  the  reason  for  entitlement,  and  (except  for 
ESRD  patients)  by  ACG.  Beneficiaries  with  ESRD  entitlement  accounted  for  2.3  percent  of 
patients  (Figure  C-3),  9.8  percent  of  reimbursements  for  physician  and  supplier  services  (Figure 
C-4),  and  3.7  percent  of  reimbursements  for  all  Medicare  covered  services  (Figure  C-5). 
Disabled  beneficiaries  accounted  for  9.1  percent  of  patients  (Figure  C-3),  10  percent  of  physician 
and  supplier  reimbursements  (Figure  C-4),  and  9.2  percent  of  all  Medicare  reimbursements 
(Figure  C-5).  Aged  beneficiaries  accounted  for  88.7  percent  of  patients  (Figure  C-3),  80.1 


"  The  creators  of  the  ACG  System  at  Johns  Hopkins  University  have  provided  the  followmg  guidelines  for 
ACG-eligible  diagnoses: 

Since  ACGs  were  originally  designed  to  predict  the  need  for  ambulatory  health  care  resources, 
assignment  of  an  ACG  is  usually  accomplished  using  diagnosis  codes  from  ambulatory  claims/encounters. 
Historically,  JHU  has  instructed  most  users  of  ACGs  to  select  diagnosis  codes  from  "face-to-face"  ambulatory 
claims  (e.g.,  claims  where  a  physician  performed  an  evaluation  or  management  service).  Since  early  in  1992  we 
have  been  experimenting  with  more  inclusive  diagnosis  code  selection  strategies. 

We  have  assigned  ACGs  using  all  diagnosis  codes  that  appear  on  a  claim  (including  inpatient  diagnoses) 
as  well  as  diagnosis  codes  from  all  professional  services  rendered  in  noninstimtional  (ambulatory)  settings.  While 
formal  sensitivity  tests  have  not  been  performed,  we  are  confident  that  these  approaches  do  not  compromise  the 
underlying  assumptions  of  the  ACG  assignment  process.... We  have  analyzed  the  explanatory  power  of  these 
approaches  and  found  them  to  be  comparable  to  ACG  assignment  using  only  "face-to-face"  ambulatory  diagnoses. 
(Johns  Hopkins  ACG  Case  Mix  System  Applications  Manual,  2nd  Ed.,  July  1993,  Johns  Hopkins  University,  p. 
11-12). 


c-6 


percent  of  physician  and  supplier  reimbursements  (Figure  C-4),  and  87.1  percent  of  all  Medicare 
reimbursements  (Figure  C-5).  Among  both  the  disabled  and  aged  beneficiaries,  there  were 
concentrations  of  patients  and  dollars  in  relatively  few  ACGs.  For  both  the  disabled  and  aged 
beneficiaries,  the  laigest  concentrations  were  in  four  ACGs  (41,  44,  49  and  50),  which  represent 
situations  involving  multiple  disorders  (see  Table  C-1).  Among  the  aged  patients.  Figure  C-5 
shows  that  these  four  ACG  categories  accounted  for  large  proportions  of  total  reimbursements: 
10.5  percent  (ACG  41),  16.1  percent  (ACG  44),  32.6  percent  (ACG  49),  and  20.3  percent  (ACG 
50). 

In  a  subsequent  year,  the  distributions  of  patients  and  reimbursements  across  the  cells 
could  change.  For  example,  there  may  be  proportionally  more  ESRD  patients.  However,  the 
performance  standards  are  based  on  the  group's  experience  and  a  specified  rate  of  increase. 
Implicit  in  the  performance  standard,  therefore,  is  the  distribution  of  patients  in  the  base  year. 
Since  ESRD  patients  are  likely  to  be  relatively  expensive,  we  may  need  to  adjust  for  changes  in 
case  mix.  Either  the  observed  RPUPS  could  be  standardized  to  the  distribution  of  patient  in  the 
base  year,  or  vice  v  rsa. 

Table  C-2  shows  the  effects  of  reweighting  the  case  mix  for  the  multispecialty  group 
shown  in  the  previous  figures,  using  distributions  of  patients  and  mean  reimbursements  per  cell 
from  different  years.  The  table  contains  three  sections,  reflecting  observed  mean  dollar  amounts 
per  cell  taken  from  1991,  1992  and  1993,  respectively.  Within  each  of  the  table's  three  sections, 
the  mean  reimbursements  per  case-mix  cell  for  Year  a  (1991  in  the  first  section)  are  multiplied 
by  the  case  mix  actually  observed  in  Years  e  and  6  (1992  and  1993).  This  yields  estimates  for 
RPUPS,  and  RPUPSq  based  on  applying  the  1991  (Year  a)  per-cell  reimbursement  rates  to  the 
case-mix  cell  distributions  of  patients  occurring  in  1992  and  1993  (Years  e  and  6).  Thus,  the 
actual  RPUPS  for  physician/supplier  services  in  1991  was  $1,810,  while  the  estimated  RPUPS 
for  1992  and  1993  were  $1,873  and  $1,891,  respectively.  Similarly,  in  the  bottom  section  of 
Table  C-2,  the  actual  RPUPS  for  physician/supplier  services  observed  in  1993  was  $1,676  with 
estimates  of  $1,600  and  $1,659  for  1991  and  1992,  respectively. 

Across  each  row  of  Table  C-2,  the  values  of  RPUPS  for  this  provider  ascend  over  time, 
suggesting  that  the  proportion  of  sicker  patients  got  larger  over  time.  In  other  words,  the 
distribution  of  patients  tended  to  change  in  the  direction  of  higher  concentrations  in  cells  with 
larger  mean  dollar  amounts.  Between  1991  and  1992,  this  change  affected  the  RPUPS  for 
physician  and  supplier  services  by  about  3.7  percent  (using  1992  mean  dollar  values  per  cell). 
For  1993,  the  cumulative  change  was  about  4.6  percent.  Comparing  the  results  using  1991,  1992 
and  1993  mean  dollars  per  cell  reveals  considerable  agreement  in  the  magnitude  of  case-mix 
changes  over  these  years.  This  suggests  that  the  relative  mean  reimbursement  amounts  per  cell 
are  fairly  stable  for  the  provider  across  the  years. 

Table  C-2  also  reveals  that  changes  in  case  mix  had  larger  proportional  effects  on  RPUPS 
values  for  all  Medicare  covered  services.  Using  once  again  1992  mean  dollar  values  per  cell,  the 
estimated  RPUPS  changed  by  about  4.2  percent  from  1991  to  1992.  Between  1991  and  1993,  the 


c-7 


cumulative  change  was  approximately  5.4  percent.  Comparing  these  results  to  those  using  1991 
or  1993  mean  dollar  values  per  cell  reveals  again  general  agreement  in  the  magnitude  of  case- 
mix  changes  over  the  years,  with  the  trend  over  time  toward  a  higher-severity  case  mix. 

Table  C-3  shows  a  similar  analysis  of  changes  in  case  mix,  but  uses  the  modified 
definition  of  RPUPS  in  which  beneficiaries  with  less  than  $120  in  reimbursements  to  the 
provider  are  excluded.  As  before,  the  results  are  similar  using  1991,  1992  or  1993  mean 
reimbursement  values  to  define  the  relative  costliness  of  patient  categories.  Imposing  the 
minimum  threshold  seems  to  reduce  the  magnitude  of  the  change  in  case  mix  between  1991  and 
1992,  from  3.7  percent  (Table  C-2)  to  2.3  percent  (using  1992  mean  dollar  values  per  case-mix 
cell  for  physician  and  supplier  services).  However,  this  desirable  effect  does  not  occur  for 
cumulative  changes  between  1991  and  1993.  The  observed  changes  increase,  from  4.6  percent 
without  the  minimum  threshold  (Table  C-2)  to  5.5  percent.  It  appears  that  excluding  this  part  of 
the  distribufion  does  not  necessarily  improve  the  statistical  reliability  of  RPUPS  for  physician 
and  supplier  services. 

Table  C-4  carries  out  the  same  analysis  using  the  high  cost  outlier  thresholds,  which 
truncate  reimbursements  for  individuals  in  excess  of  $10,000  for  physician  and  supplier  services 
and  $30,000  for  all  Medicare  covered  services.  For  physician/supplier  services,  there  seems  to 
be  modest  but  consistent  improvement  using  the  threshold.  Using  1992  mean  dollar  values  per 
cell  as  in  Table  C-2,  the  magnitude  of  changes  in  case  mix  decreases  by  roughly  one-half  a 
percentage  point  for  both  the  1991-1992  comparisons  (3.7  to  3.2)  and  the  1991-1993 
comparisons  (4.6  to  4.2).  This  suggests  that  the  influence  of  outliers  can  lead  to  differences  in 
RPUPS  across  years  that  are  not  recognized  by  the  risk  adjustment  system. 

D.   Implications  of  Altemafive  Definitions 

Figures  C-6  through  C-9  show  results  of  provider  versus  market  level  increases  in  which 
beneficiaries  with  less  than  $  1 20  in  reimbursements  to  that  provider  were  excluded  from  RPUPS 
measures.  The  random  beneficiary  samples  were  used  to  estimate  market  level  changes, 
however,  there  is  no  specific  provider  referenced.  In  general,  the  data  points  tend  to  scatter  more 
and  the  average  absolute  percentage  deviations  tend  to  increase,  compared  to  results  shown  in 
Figures  5  through  8.  For  the  selected  physician  groups  as  well,  in  Figure  C-8  several  points 
move  quite  a  distance  away  from  the  origin — for  instance.  Groups  K,  M  and  N.  For  the 
following  year,  in  Figure  C-9,  there  also  are  big  changes — notably  for  Groups  K  and  L.  Given 
the  generally  worse  performance  of  the  models  that  exclude  some  beneficiaries,  these  big 
changes  may  be  considered  suspect  until  any  further  vindicating  evidence  is  obtained. 

Figures  C-10  and  C-1 1  show  the  1991-1993  cumulative  results  for  models  that  exclude 
beneficiaries  with  less  than  $120  in  Medicare  reimbursements  to  the  provider.  As  before,  the 
points  tend  to  scatter  more  than  without  the  minimum  threshold,  and  the  average  deviations  are 
greater.  For  physician  and  supplier  services,  the  average  absolute  percentage  deviation  increases 
from  8.1  percent  to  9.6  percent;  for  all  Medicare  services,  the  increase  is  from  9.5  percent  to  1 1.9 


c-8 


percent.  Most  of  the  selected  providers  remain  in  the  third  quadrant  in  Figure  C-1 1 .  Groups  L, 
N  and  O  appear  to  perform  worse  with  the  threshold,  while  Groups  K  and  M  appear  to  perform 
better.  Again,  at  this  point  it  is  unclear  whether  these  significant  changes  are  desirable  given  the 
poorer  statistical  performance  of  the  model  with  minimum  reimbursement  thresholds. 

E.    Adjustments  for  Changes  in  Case  Mix 

The  results  presented  so  far  have  not  taken  into  account  possible  changes  in  the  case  mix 
of  Medicare  patients  seen  by  a  provider.  We  anticipate  that  the  mix  of  patients  seen  by  a  large, 
mature  provider  organization  will  exhibit  less  difference  over  time  than  exists  between  providers 
during  any  given  year.  Consequently,  the  pressure  put  on  a  risk  adjustment  system  is  likely  to  be 
less  in  this  context  than,  for  example,  accounting  for  differences  between  local  areas  or  enrolled 
populations. 

We  investigate  the  effects  of  changes  in  case  mix  in  two  ways.  First,  we  categorize 
Medicare  patients  into  risk  cells,  reflecting  different  relative  expected  reimbursement  rates. 
Second,  we  look  at  the  influence  of  high  cost  outlier  patients  on  the  stability  and  validity  of 
RPUPS. 

Each  year  we  can  analyze  changes  that  take  place  in  the  distribution  of  patients  across 
these  cells.  The  proportions  of  Medicare  patients  seen  may  tend  to  shift  toward  (or  away  from) 
cells  with  higher  relative  costs,  suggesting  sicker  (or  healthier)  case  mixes.  The  observed 
RPUPS  can  be  standardized  to  reflect  the  original  (i.e.,  the  base  year)  distribution  of  patients,  in 
order  to  remove  the  influence  of  changes  in  case  mix.  An  equivalent  approach  would  be  to 
standardize  the  target  level  to  reflect  the  distribution  of  actual  patients  seen  in  the  performance 
year.  We  might  prefer  the  latter  policy  because  savings  estimates  in  the  performance  year 
depend  on  who  the  provider  saw  this  year  and  not  some  previous  year. 

To  classify  Medicare  beneficiaries  according  to  relative  costliness,  we  chose  two  types  of 
categories:  Reason  for  Medicare  enfitlement,  and  Ambulatory  Care  Groups  (ACGs).  In  order  to 
make  case  mix  adjustments  for  a  particular  group  over  time,  the  following  steps  were  taken: 

The  patient  populations  in  the  base  and  performance  years  were 
partitioned  separately  into  85  risk  cell  categories.  First,  beneficiaries  were 
separated  according  to  reason  for  entitlement:  ESRD,  Disabled,  and  Aged. 
The  Disabled  were  placed  into  40  ACG  categories,  while  the  Aged  were 
place  into  35  ACG  categories.^ 


5  There  are  fewer  categories  available  than  103  (1  +  51  +  51)  because  some  ACG  categories  include  age 
criteria.  For  example,  an  Aged  beneficiary  cannot  be  placed  in  ACG  2  which  only  applies  to  patients  ages  2-5 
years. 


c-9 


•  For  the  hypothetical  performance  year,  we  determined  the  percentage 
distribution  of  patients  across  cells  and  the  mean  reimbursements  for 
patients  in  each  cell.  These  are  the  components  of  the  actual  value  of 
RPUPS  in  the  performance  year.  That  is,  the  sum  of  the  products  for  each 
cell  in  which  the  percentage  of  patients  is  multiplied  by  the  mean 
reimbursement  amount. 

•  The  observed  patient  distribution  in  the  performance  year  was  applied  to 
the  base  year,  using  reimbursement  dollars  per  patient  in  the  base  year.  In 
other  words,  the  mean  reimbursements  per  cell  in  the  base  year  were 
reweighted  using  the  patient  distribution  in  the  performance  year.  This  • 
results  in  a  new,  adjusted  value  of  RPUPS  for  the  base  year  that  estimates 
what  a  hypothetical  patient  population  for  the  group  (i.e.,  that  mirrors  the 
performance  year)  would  have  experienced  in  Medicare  reimbursements. 

To  the  adjusted  value  of  RPUPS  for  the  base  year  we  applied  a  market 
level  rate  of  increase.  (The  market  rate  of  increase  also  was  adjusted  for 
changes  in  case  mix,  using  the  same  two-tiered  classification  system). 
This  is  an  adjusted  performance  standard  that  now  reflects  the  same  health 
status  distribution  that  actually  occurred  in  the  performance  year,  and  that 
only  adjusts  for  changes  in  patients'  health  status  relative  to  average 
changes  for  all  local  providers. 

Figures  C-12  through  C-17  show  resuhs  for  adjusting  for  health  status  the  performance  of 
groups  for  the  years  1991-1992,  1992-1993,  and  1991-1993.  Results  are  shown  for  all  services 
and  for  physician  and  supplier  services  only.  These  figures  depict  deviations  from  the  targets 
that  are  based  on  average  rates  of  growth  for  the  respective  markets.^  For  all  services,  the  figures 
show  three  measures  of  performance  for  each  group: 

Unadjusted  RPUPS  (Unadjusted:  black  bar); 

RPUPS  adjusted  for  the  86  patient  health  status  categories  as  described  earlier.  (HS 
Adjusted:  gray  bar); 

RPUPS  adjusted  for  health  status  and  also  truncated  at  a  maximum  reimbursement  level 
of  $30,000  per  patient  (HS  /  Outlier:  white  bar). 

For  physician  and  supplier  services,  the  figures  show  only  the  first  two  measures  of  performance 
for  each  group,  i.e.,  without  the  high  cost  outlier  adjustment.  The  10  groups  are  ordered  from  left 


'The  MFS  was  implemented  during  the  course  of  this  1991-1993  period.  Local  procedure  codes  were  phased  out  in 
favor  of  CPT-4  codes.  In  addition,  specialty-based  differentials  in  physician  payment  were  eliminated  after  1991.  The  impact 
of  these  changes  on  any  provider's  rate  of  growth  relative  to  the  market  is  uncertain  at  this  time. 


C-10 


to  right  (i.e.,  from  1  to  10)  based  on  the  unadjusted  value  of  their  1992  RPUPS  for  all  services 
relative  to  the  target  RPUPS  for  these  groups  (Figure  C-12).  Group  1  has  the  greatest  dc\  iation 
above  the  target  while  Group  10  has  the  greatest  deviation  below  the  target  (see  the  black  bars  in 
Figure  C-12).  The  groups  are  presented  in  the  same  order  for  all  subsequent  figures. 

In  Figure  C-12,  four  groups  (Groups  1  through  4)  exceeded  the  unadjusted  1992  RPUPS 
target  for  total  Medicare  services,  with  Group  1  approximately  4  percent  over  the  target.  In  most 
cases,  adjusting  for  health  status  makes  groups'  performance  appear  worse.  After  adjusting  for 
health  status.  Groups  6  and  8  switch  from  being  below  to  being  above  their  targets,  while  Group 
1  switches  from  being  above  to  being  below  its  target.  Truncation  of  high  cost  outlier  . 
reimbursements  also  leads  to  mixed  results  in  the  apparent  performance  of  the  groups. 

For  physician  and  supplier  services.  Figure  C-13  shows  that  eight  of  the  ten  groups  have 
unadjusted  1992  RPUPS  under  the  target,  suggesting  that  groups  may  be  able  to  better  manage 
this  component  of  services.  In  most  cases,  health  status  adjustment  appears  to  worsen  the 
performance. 

From  1992  to  1993,  more  groups  were  under  their  unadjusted  RPUPS  target  for  all 
services,  with  Group  10  over  10  percent  below  target  (Figure  C-14).  After  adjusting  for  health 
status,  Groups  1  and  4  appear  better  relative  to  their  targets.  For  the  rest  of  the  groups,  health 
status  adjustment  leads  the  groups  to  appear  worse  in  comparisons  to  targets.  Overall,  truncation 
tends  to  weakens  apparent  performance  as  well. 

Similar  to  the  previous  year,  groups  tend  to  be  more  successful  in  being  under  target  for 
physician  and  supplier  services  (Figure  C-15).  Only  Group  9  was  above  the  unadjusted  RPUPS 
target.  However,  as  before,  health  status  adjustment  typically  does  not  improve  performance 
(with  the  exceptions  of  Groups  1  and  4). 

For  1991  to  1993,  eight  groups  performed  below  the  unadjusted  1993  RPUPS  target  for 
all  services  (Figure  C-16).  Group  10  appears  to  perform  best,  being  almost  10  percent  under 
target.  Adjustments  to  target  for  health  status  and  truncation  have  effects  that  are  similar  to  those 
observed  previously.  For  physician  and  supplier  services  (Figure  C-17),  eight  groups  perform 
below  target  for  unadjusted  RPUPS.  Adjustment  for  health  status  improves  the  performance  of 
Groups  1  and  4  but  weakens  the  performance  of  the  remaining  groups. 

Overall,  for  these  performance  years.  Groups  8  and  10  were  most  successftil  in 
performing  below  the  target  for  all  services,  while  Group  2  was  least  successful.  In  terms  of 
physician  and  supplier  services.  Groups  5  and  10  had  the  best  performance,  and  Groups  2,  6,  and 
9  the  worst  over  the  three  years. 

If  groups  exceed  their  unadjusted  target,  one  explanation  may  be  that  their  case-mix  has 
gotten  worse.  Similarly,  if  they  are  under  their  target,  one  explanation  may  be  that  their  case-mix 
has  gotten  better.  Adjustment  for  health  status  should  help  to  eliminate  deviance  due  to  this 


c-11 


factor.  We  attempted  to  adjust  for  health  status  in  order  to  see  the  extent  to  which  apparent 
performance  would  change.  In  general,  we  found  that  group  performance  tended  to  worsen  after 
health  status  adjustments. 

At  this  point  we  cannot  be  sure  that  the  health  status  adjustment  approach  we  explored  is 
adequate.  Some  of  our  concern  stems  from  the  concentration  of  patients  and  reimbursements  in 
so  few  of  the  health  status  cells,  as  was  shown  in  Figures  C-3  through  C-5.  This  pattern  was 
observed  for  all  of  the  groups,  and  even  the  random  beneficiary  samples  drawn  from  each  market 
area. 

Other  concerns  relate  to  findings  for  the  random  samples  in  our  study.  For  .any  case-mix 
adjustment  method,  the  health  status  in  a  random  sample  of  beneficiaries  should  be  expected  to 
remain  rather  constant  from  one  year  to  the  next.  In  order  to  test  this,  we  drew  a  random  sample 
of  beneficiaries  from  each  of  our  groups'  market  areas,  and  applied  the  same  health  status 
adjustment  methodology  to  them.  Without  exception,  the  apparent  severity  of  illness  in  these 
random  beneficiary  samples  increased  over  the  three-year  period.  Severity  of  illness  for  the  ten 
groups  appeared  to  increase  as  well,  but  at  a  lower  rate  than  that  observed  in  their  respective 
markets. 

There  could  be  several  explanations  for  this.  One  is  that  coding  and  documentation  may 
have  become  more  accurate  and  extensive  over  time.  This  would  have  consequences  for  the 
ACQ  classificafions  if  the  number  of  diagnosis  codes  presented  on  claims  increased  over  this 
period.  Indeed,  more  ICD-9  codes  were  reportable  on  facility  claims  as  of  1992,  and  we  used 
diagnostic  codes  from  all  places  of  service  in  the  case-mix  adjustments.  Also,  providers  may  be 
exhibiting  greater  sensitivity  to  accurate  coding  as  a  by-product  of  the  implementation  of  MFS, 
or  the  fact  that  claims  processing  procedures  of  payers  other  than  Medicare  may  have  become 
more  demanding. 

The  faster  rate  of  increase  in  the  severity  of  illness  for  the  market  versus  the  ten  groups 
may  be  due  to  the  fact  that  the  coding  practices  of  providers  in  the  market  lagged  behind  that  of 
the  groups  at  the  start  of  the  three-year  period.  Subsequent  improvements  in  the  coding  practices 
of  the  average  provider  may  have  had  the  effect  of  artificially  lowering  the  observed  performance 
of  the  groups.  Since  the  majority  of  our  groups  have  well-developed  managerial  and 
administrative  support  structures,  they  were  likely  coding  more  accurately  and  completely  before 
the  average  provider  in  the  market.  As  mentioned  above,  the  implementation  of  MFS  eliminated 
payment  differentials  based  on  local  codes  and  physician  specialties.  This  change  might  have 
affected  the  10  groups  and  their  markets  differently,  so  that  the  severity  of  illness  in  the  markets 
increased  at  a  faster  rate. 

A  second  explanation  may  be  that  ACG  classification  may  be  an  inappropriate  health 
status  adjustment  tool  for  Medicare  beneficiaries.  The  ACG  system  was  first  developed  for 
assessing  the  provision  of  ambulatory  care,  and  was  inifially  based  on  using  diagnoses  recorded 
during  ambulatory  encounters.  The  approach  used  in  this  project  included  inpatient  diagnoses  as 


C-12 


well,  and  the  Medicare  population  uses  relatively  more  inpatient  services.  In  addition,  because 
most  of  the  10  groups  are  sophisticated  tertiary/quaternary  providers,  the  patients  seen  by  these 
groups  require  even  more  inpatient  services  than  Medicare  beneficiaries  in  general.  As  a  result, 
any  weaknesses  in  using  the  ACG  system  in  assessing  the  use  of  inpatient  services  is  exacerbated 
for  the  groups  at  hand. 

We  continue  to  explore  the  application  of  ACGs  and  other  case-mix  methodologies  to 
GVPS.  Other  health  status  adjusters  could  ultimately  prove  more  appropriate  for  the  Medicare 
beneficiary  population. 

F.    Adjustments  for  Changes  in  Pricing 

Medicare  make  changes  to  both  its  procedure  codings  and  their  corresponding 
reimbursement  values  every  year.  Under  GVPS  the  apparent  stability  of  RPUPS  could  be 
affected  by  such  changes.  In  addition,  there  are  yearly  changes  in  reimbursements  across 
geographic  areas,  for  example  due  to  chances  in  wage  scales.  To  deal  fairly  with  these  issues  it 
may  be  necessary  to  control  for  geographic  factors  and  for  Medicare  changes  in  coding  and 
pricing. 

In  order  to  standardize  claim  reimbursements  in  the  light  of  geographic  differences,  we 
would  need  to  divide  our  reimbursements  by  appropriate  geographic  factors,  which  vary  by  type 
of  service: 

•  Inpatient  hospital  payments  are  adjusted  for  each  MSA  or  rural  county  in  a  state; 

•  Physician  payments  are  adjusted  by  carrier  defined  localities; 

Other  services  are  cost-based  but  would  require  a  similar  adjustment. 

To  control  for  changes  in  Medicare  pricing  and  procedure  codings  which  show  up  over 
time,  a  refined  approach  would  be  to  create  two  RPUPS  for  each  fiscal  year.  The  one  reflecting 
actual  payments  would  be  compared  with  the  GVPS  target  to  determine  performance  and 
whether  or  not  a  reward  is  to  be  granted.  The  second  RPUPS  would  be  created  a  year  later 
reflecting  simulated  payments  per  claim  after  crosswalking  to  new  procedure  and  pricing  files  to 
show  what  would  have  been  paid  if  the  new  year's  rules  had  been  in  effect.  This  latter  RPUPS 
would  form  the  baseline  measure  on  which  the  next  GVPS  target  would  be  based. 

The  following  example  shows  how  this  might  work: 

Actual  code:  1234  RVU  =  1 .00  (CF=30)  Reimbursement  =  $30.00 
Changed  code:     1234.1    RVU  =1.10  (CF=33)  Reimbursement  =  $33.00. 


C-13 


In  the  example  a  reimbursement  of  $30.00  is  used  in  calculating  the  RPUPS  for  the  year  of  the 
claim.  However,  the  next  year  the  payment  is  counted  as  $33.00  in  calculating  the  baseline 
RPUPS  for  computing  GVPS  target,  this  to  reflect  that  the  cost  for  the  corresponding  procedure 
during  the  new  year  would  have  been  the  higher  amount. 

In  our  statistical  analyses  we  compare  both  original  and  adjusted  RPUPS  to  learn  whether 
refinements  to  remove  price  effects  actually  improve  stability,  as  we  hypothesize  that  they  will. 
Obviously,  geographic  adjustments  would  be  unnecessary  if  wage  increases  and  other  regional 
factors  changed  more  or  less  in  unison.  After  all,  national  changes  are  suppose  to  be  dealt  with 
through  the  performance  standards.  Also,  it  must  be  admitted  that  a  retrospective  effort  to  adjust 
for  pricing  and  procedure  changes  could  be  detrimental  to  the  underlying  goals  of  the  GVPS 
program  by  diminishing  evidence  "procedure  creep,"  whereby  providers  make  upward 
modifications  in  their  procedure  codes  to  compensate  for  expected  payment  reductions  due  to 
refinements  in  Medicare's  reimbursement  systems. 

G.   Comparisons  of  Procedure  Mix:  Local  Averages  Versus  a  Provider'^  Patients 

We  have  proposed  models  in  which  the  rate  of  increase  applied  to  a  group's  baseline 
value  of  RPUPS  would  be  based  on  the  average  projected  rate  of  increase  for  the  local  area.  This 
is  in  keeping  with  the  premise  that  groups  could  actively  manage  their  patients'  care,  and  two 
related  assumptions: 

The  group's  management  expertise  includes  primary  care,  or  evaluation  and  management 
services; 

•         The  group's  patients  are  broadly  representative  of  the  local  Medicare  population. 

The  potential  for  these  assumptions  to  be  violated  raises  two  types  of  questions  regarding 
the  GVPS  models: 

Should  criteria  for  eligibility  include  tests  about  a  group's  mix  of  patients  or  services,  and 
the  degree  of  similarity  to  market  averages? 

How  robust  is  the  basic  model  in  which  market  level  increases  are  applied  to  specific 
groups'  patients? 

Section  IX  of  the  report  discusses  possible  eligibility  criteria  that  would  require  expertise  in  the 
management  of  patients'  services.  The  criteria  could  be  expanded  to  make  sure  a  group  does 
resemble  the  market,  in  which  case  the  average  rate  of  increase  would  apply.  However,  some 
differences  can  be  expected  for  many,  if  not  all  groups.  We  briefly  examine  two  possible 
methods  to  adjust  rates  of  increase  for  a  group's  patient  population  that  does  not  resemble 
sufficiently  the  local  patient  population.  One  method  is  based  on  patient  case  mix,  and  a  similar 
alternative  is  based  on  procedure  mix. 


C-14 


The  numerator  of  a  group's  RPUPS  includes  all  reimbursements  for  services  to  the 
patients  seen  by  the  group,  regardless  of  the  provider.  In  the  proposed  model,  a  group's  patient 
population  is  basically  a  small  subset  of  the  "local"  Medicare  population,  since  areas  are  defined 
by  the  patients'  coumies  of  residence.  Therefore,  the  expected  rate  of  expenditure  growth  at  the 
market  level  is  an  average  that  includes  the  provider's  own  patients  and  the  array  of  services  they 
use. 

The  expected  rate  of  growth  in  expenditures  can  differ  significantly  across  categories  of 
service  and  perhaps  categories  of  patients.  Reimbursements  for  services  can  be  arrayed  along 
dimensions  that  include  type  or  place  of  provider,  and  type  of  procedure.  For  example,  Medicare 
services  can  be  divided  into  inpatient  hospital,  outpafient  facility,  home  health,  physician,  etc. 
Furthermore,  reimbursements  within  these  groupings  can  be  divided  by  procedure.  For  example, 
physician  reimbursements  can  be  divided  into  more  refined  categories.  Patients  can  be  arrayed 
along  categories  like  those  used  in  this  study,  e.g.,  reason  for  entitlement  or  diagnostic  mix. 

Whichever  i.iXay  is  chosen,  i.e.,  services  or  patients,  the  reimbursements  at  the  market 
level  and  the  group  level  can  be  categorized  accordingly.  We  can  calculate  the  distribution  of 
reimbursements  across  the  categories.  For  example,  at  the  market  level,  60  percent  of 
reimbursements  may  be  for  inpafient  hosphal.  For  a  particular  group,  70  percent  of  the 
reimbursements  may  be  for  inpatient  hospital.  Assuming  growth  in  expenditures  for  inpatient 
hospital  is  different  than  the  average  for  other  services,  we  can  reweight  the  distribufion  of 
reimbursements  at  the  market  level  to  mimic  that  of  the  group.  In  the  example,  we  could 
increase  the  weight  given  to  inpatient  hospital  reimbursements  when  setting  the  market  level  rate 
of  increase  that  is  applied  to  the  group. 

A  simpler  adjustment  could  be  based  on  Part  A  versus  Part  B  reimbursements.  More 
elaborate  adjustments  could  be  based  on  type  of  procedures,  such  as  the  method  of  service 
classification  developed  by  Berenson  and  Eggers  for  HCFA.  They  divide  physician  procedures 
into:  Evaluation  and  Management,  Procedures,  Imaging,  Tests,  and  Other.  Each  of  these 
categories  also  is  divided  into  between  four  and  eight  subcategories.  Alternatively, 
reimbursement  rates  could  be  weighted  in  an  analogous  fashion  to  match  the  distribution  of 
patients  seen  by  the  group. 

The  effect  of  refinements  such  as  these  would  be  to  project  the  rate  of  increase  for  the 
group's  particular  mix  of  patients  (measured  as  patient  or  service  mix).  The  increases  still  would 
be  based  on  the  experience  and  expectations  for  the  average  provider  in  the  market,  adjusted  to 
simulate  a  hypothetical  average  provider  with  the  particular  group's  mix  of  patients. 


C-15 


TABLE  C-1:  AMBULATORY  CARE  GROUP  (ACG)  CATEGORIES 

AGO 

ACG  DESCRIPTION 

1 

Acute  Minor,  Age  <  1 

2 

Acute  Minor,  Age  2-5 

3 

Acute  Minor,  Age  6+ 

4 

Acute:  Major 

5 

Likely  to  Recur,  Without  Allergies 

6 

Likely  to  Recur,  With  Allergies 

7 

Asthma 

8 

Chronic  Medical,  Unstable 

9 

Chronic  Medical,  Stable 

10 

Chronic  Specialty 

11 

Ophthalmological/Dental 

12 

Chronic  Specialty,  Unstable 

13 

Psychosocial,  Without  Psychosocial  Major 

14 

Psychosocial,  With  Psychosocial  Major,  Without  Psychosocial  Minor 

15 

Psychosocial,  With  Psychosocial  Major,  With  Psychosocial  Minor 

16 

Preventive/ Administrative 

17 

Pregnancy 

18 

Acute  Minor  and  Acute  Major 

19 

Acute  Minor  and  Likely  to  Recur  Discrete,  Age  <  1 

20 

Acute  Minor  and  Likely  to  Recur  Discrete,  Age  2-5 

21 

Acute  Minor  and  Likely  to  Recur  Discrete,  Age  >  5,  Without  Allergy 

22 

Acute  Minor  and  Likely  to  Recur  Discrete,  Age  >  5,  With  Allergy 

23 

Acute  Minor  and  Chronic  Medical:  Stable 

24 

Acute  Minor  and  Eye/Dental 

25 

Acute  Minor  and  Psychosocial  Without  Psychosocial  Major 

26 

Acute  Minor  and  Psychosocial  With  Psychosocial  Major,  Without  Psychosocial  Minor 

C-16 


ACG 

ACG  DESCRIPTION 

27 

Acute  Minor  and  Psychosocial  with  Psychosocial  Major  and  Minor 

28 

Acute  Major  and  Likely  to  Recur  Discrete 

29 

Acute  Minor/ Acute  Major/Likely  to  Recur  Discrete,  Age  <  2 

30 

Acute  Minor/ Acute  Major/Likely  to  Recur  Discrete,  Age  2-5 

31 

Acute  Minor/Acute  Major/Likely  to  Recur  Discrete,  Age  6-1 1 

32 

Acute  Minor/ Acute  Major/Likely  to  Recur  Discrete,  Age  >  5,  Without  Allergy 

Acute  Minor/Acute  Major/Likely  to  Recur  Discrete,  Age  >  5,  With  Allergy 

34 

Acute  Minor/Likely  to  Recur  Discrete/Eye  &  Dental  , 

35 

Acute  Minor/Likely  to  Recur  Discrete/Psychosocial 

36 

Acute  Minor/ Acute  Major/Likely  to  Recur  Discrete/Eye  &  Dental 

37 

Acute  Minor/Acute  Major/Likely  to  Recur  Discrete/Psychosocial 

38 

2-3  Other  ADG  Combinations,  Age  <  17 

39 

2-3  Other  ADG  Combinations,  Males  Age  17-34 

40 

2-3  Other  ADG  Combinations,  Females  Age  17-34 

41 

2-3  Other  ADG  Combinations,  Age  >  34 

42 

4-5  Other  ADG  Combinations,  Age  <  17 

43 

4-5  Other  ADG  Combinations,  Age  17-44 

44 

4-5  Other  ADG  Combinations,  Age  >  44 

45 

6-9  Other  ADG  Combinations,  Age  <  6 

46 

6-9  Other  ADG  Combinations,  Age  6-16 

47 

6-9  Other  ADG  Combinations,  Males  Age  17-34 

48 

6-9  Other  ADG  Combinations,  Females  Age  17-34 

49 

6-9  Other  ADG  Combinations,  Age  >  34 

50 

10+  Other  ADG  Combinations 

51 

No  Visits  and/or  No  ADGs 

Source:  Weiner,  J.P.  "A  CHnician's  Guide  to  the  Johns  Hopkins  Ambulatory  Care  Group  (ACG) 
Case-Mix  System".  1992  Johns  Hopkins  University. 


C--I7 

Table  C-2:  Effects  of  Changes  in  Case  Mix*  on  RPUPS  Values  (One  Group) 


1991  Mean  Dollars  Per  Cell 


Scope  of  Services 

1991  Case  Mix 

1992  Case  Mix 

1993  Case  Mix 

Physician/Supplier 

$1,810 

$1,873 

$1,891 

%  Change  from  1991 

3.5 

4.5 

All  Medicare 

$6,085 

$6,330 

$6,390 

%  Change  from  1991 

4.0 

5.0 

1992  Mean  Dollars  Per  Cell 


Scope  of  Services 

1991  Case  Mix 

1992  Case  Mix 

1993  Case  Mix 

Physician/Supplier 

$1,681 

$1,743 

$1,758 

%  Change  from  1991 

3.7 

4.6 

All  Medicare 

$6,490 

$6,763 

$6,838 

%  Change  from  1991 

4.2 

5.4 

1993  Mean  Dollars  Per  Cell 


Scope  of  Services 

1991  Case  Mix 

1992  Case  Mix 

1993  Case  Mix 

Physician/Supplier 

$1,600 

$1,659 

$1,676 

%  Change  from  1991 

3.7 

4.8 

All  Medicare 

$6,620 

$6,906 

$6,984 

%  Change  from  1991 

4.3 

5.5 

Source:  National  Claims  History  file,  1991-1993. 
*        Derived  from  Ambulatory  Care  Groups. 


C--18 


Table  C-3:  Effects  of  Changes  in  Case  Mix*  RPUPS  Values,  With  Minimum 

Threshold** 


1991  Mean  Dollars  Per  Cell 


Scope  of  Services 

1991  Case  Mix 

1992  Case  Mix 

1993  Case  Mix 

Physician/Supplier 

$2,276 

$2,325 

$2,395 

%  Change  from  1991 

2.2 

5.2 

1 992  Mean  Dollars  Per  Cell 

Scope  of  Services 

1991  Case  Mix 

1992  Case  Mix 

1993  Case  Mix 

Physician/Supplier 

$2,118 

$2,166 

$2,234 

%  Change  from  1991 

2.3 

5.5 

1 993  Mean  Dollars  Per  Cell 

Scope  of  Services 

1991  Case  Mix 

1992  Case  Mix 

1993  Case  Mix 

Physician/Supplier 

$2,029 

$2,075 

$2,141 

%  Change  from  1991 

2.3 

5.5 

Source:  National  Claims  History  File. 


* 

** 


Derived  from  Ambulatory  Care  Groups. 

Minimum  reimbursement  threshold  to  provider  of  $120. 


C-19 


Table  C-4:  Effects  of  Changes  in  Case  Mix*  RPUPS  Values,  With  Outlier 

Tlireshold** 


1991  Mean  Dollars  Per  Cell 


Scope  of  Services 

1991  Case  Mix 

1992  Case  Mix 

1993  Case  Mix 

Physician/Supplier 

$1,709 

$1,762 

$1,780 

%  Change  from  1991 

3.1 

4.2 

All  Medicare 

$5,245 

$5,425 

$5,476  _ 

%  Change  from  1991 

3.4 

4.4 

1992  Mean  Dollars  Per  Cell 


Scope  of  Services 

1991  Case  Mix 

1992  Case  Mix 

1993  Case  Mix 

Physician/Supplier 

$1,602 

$1,654 

$1,670 

%  Change  from  1991 

3.2 

4.2 

All  Medicare 

$5,396 

$5,583 

$5,640 

%  Change  from  1991 

3.5 

4.5 

1993  Mean  Dollars  Per  Cell 


Scope  of  Services 

1991  Case  Mix 

1992  Case  Mix 

1993  Case  Mix 

Physician/Supplier 

$1,543 

$1,595 

$1,612 

%  Change  from  1991 

3.4 

4.5 

All  Medicare 

$5,461 

$5,654 

$5,711 

%  Change  from  1991 

3.5 

4.6 

Source:  National  Claims  History  File. 

*        Derived  from  Ambulatory  Care  Groups 

**       Outlier  thresholds  are  $10,000  for  physician  and  supplier  servies,  and  $30,000  for  all 
services. 


Figure  C-1:  Percentage  Decrease  in  Patients  Seen  by  Omitting  Patients  with  <  $120  to  Provider 

(Physician  and  Supplier  Services) 

Provider 

1    3    5    7    9  11  13  15  17  19  21  23  25  27  29  31  33  35  37  39  41  43  45  47  49  51  53  55  57  59  61  63  65  67  69  71  73  75  77 


0% 


-10% 


-20% 


-30% 


-40% 


-50% 


-60% 


-70% 


-80% 


-90% 


-100% 


Source:  National  Claims  History  file,  1992. 


Figure  C-2:  Patient  Capture  Ratio,  Omitting  Patients  With  <  $120  to  Provider 

(Physician  and  Supplier  Services) 


t— 1  1  1  1  1  1  r-1  1—1  1  1  1  1  1 "  I  "  I  "  !  "  "  'I  i  "  "  i  "  i  "  "  I  "  "  I  "  ("  i  U        U  i  II 1 II  II  II  I'  "  M  "  "  II  i  "  "  i  M  I  M  "  I  "  ;  "  "  I  "       I  "  "  ■■  I  "  I  "  "  I  "  i 

1    3    5    7    9  11  13  15  17  19  21  23  25  27  29  31  33  35  37  39  41  43  45  47  49  51  53  55  57  59  61  63  65  67  69  71  73  75  77 
Source:  National  Claims  History  file,  1992.  Provider 


Figure  C-3:  Breakdown  of  One  Group's  Patients  by  Health  Status 


0.35 


0.3 


0.25 


0.2 


0.15 


0.1 


0.05 


D  =  Disabled  by  ACG 
A  =  Aged  by  ACG 


0 


I  I  l-M-l  I  ri-l  I  I  I  M  11  l-l  I  hi  M  I  I  I  l-l  I  I  l-l  I  I  l-l-l         l"!"!  I  I  I         I  I'l"!-!-!"!  hi  W  l"l  I  I'l  l"l  I  I  I  l"l  I  I  I'  'I-I  I  I  I' 


JUL 


l"l  llli  I  |B|  iDi. 


D 

C/) 
lU 


I 

Q 


00 

6 


CO 


O 

Q 


CM 


CD 
CM 


CM 
CO 

I 

a 


CD 
CO 


O 


CO 


in  o 
<  < 


CO 


T-  CM 


in 


CD 
CM 


CO 
CO 


CO 


I 

< 


in 


cn 


Source:  National  Claims  History  file,  1992. 


CNI 

1 

a 


Figure  C-4:  Breakdown  of  Reimbursements  by  Patients'  Health  Status,  for  One  Group 

(Physician  and  Supplier  Services) 


< 
o 


c 
E 

0) 
CO 

t  

E 


c 
o 

o 

Q. 
O 

a. 


0.35 


0.3 


0.25 


0.2 


0.15 


0.1 


0.05 


D  =  Disabled  by  ACG 
A  =  Aged  by  ACG 


I  I  I  I  I  I  I  1-1  I  I  I  I  M  I 
Q        ^        00  CN 

Q     6  1 


1 1 1 1 1 1 1 1  I  I  1  I  I  I  l-l  1 1  I  l-l-l  I  I  l"l  I 


I  I  I  I  l-l  I  I  l"l  I  I  l-l  'I  I  I  I  l-l  I  I  I  l-l  I  t  M-l  I  I  M  I  l-l' 


"i  I  I  I  I'll  1  i"i  I  I  I  m 


CD  O 


D 


CM 

I 

D 


00 
CM 


C-4 
CO 


CD 
CO 


O 


00 


I 

< 


in 

CM 


CVJ 


CO 
CO 


CO 


I 

< 


If) 


cn 


Source:  National  Claims  History  file,  1992, 


I 

U 


Figure  C-5:  Breakdown  of  Reimbursements  by  Patients'  Health  Status  for  One  Group 

(All  Medicare  Services) 


0.35 


0.3 


i  0.25 


0.2 


0.15 


0.1 


0.05 


D  =  Disabled  by  ACG 
A  =  Aged  by  ACG 


0 


III  Ill-Ill  l-l-l  I  I  I  l-l  I  I  l-l  I  l-l  I  I  I  I  I  I  I  I  I  M  I  I  l-l-l  l-l  l"l        I  I  I  I  I 


Q 


D 


00 

I 

Q 


Q 


CD 
t— 

Q 


O 

I 

Q 


CO 
CN 


CO 


CO 


O 


03 


in 

t 

< 


I 

< 


CO 


■I  l°l  l°l 


■  ini  n-i  1-1  jPi  I  I  |n|  I  |-|"m  I  I  l"l  I  l"l  I  I  I  I"'"' 


CM 

I 

< 


in 
eg 


CM 


CO 
CO 


CO 


< 


in 


CD 


Source:  National  Claims  History  file,  1992, 


Figure  C-6:  Deviations  from  Targets  for  78  Providers  in  10  Market  Areas:  1991  to  1992.  Excluding 

Patients  with  <$1 20  to  Provider 

 -QS- 


C.3 


0.5 


0.4  -- 


0.3 


0.2  - 


0.1  - 


♦  ♦. 


0^ 


-0.2 


-0.1 


♦ 

♦ 


♦  ♦  ♦ 


♦  ♦ 


♦  ♦ 


♦ 


0 


♦ 
♦ 


♦ 


-0.1' 


-0.2 


0.1 


0.3 


 OtS- 

Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements 


Source:  NCH  file,  1991  and  1992. 


CM 
I 

U 


i2 
c 
a> 
E 

!2 

3 
X) 

E 
'S 
q: 

s 

o 


tn 

q3 

E 

(0 

c 
g 

(0 

> 

0) 
Q 

Q) 
O) 

to 
c 

Q) 
O 
u. 
(U 
Q. 


-0 


25 


Figure  C-7:  Deviations  from  Targets  for  78  Providers  in  10  IVIarket  Areas:  1992  to  1993,  Excluding 

Patients  v^ith  <  $1 20  to  Provider 


-0t2- 


0.1 


♦ 
♦ 


-0.2 


-0.15 


-0.1  ♦-o.Qe 

♦  t  * 

♦       ♦  ♦  -  ♦ 

►  ♦ 


♦  ♦ 


-0.1 


-0.2 


-0.3 


-OA- 


-♦I — 

0.05 


0.1 


0.15 


Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements 

Source:  NCH  file,  1992  and  1993. 


I 

KJ 


(D 

E 
a> 

i2 

3 
X> 

E 

B 
a> 

E  ■ 

m 

■c 
o 

ia 

*l 
Q 

0) 

D) 

TO 
' 

C 

<u 
at 

Q. 


25 


Figure  C-8:  Deviations  from  Tarc  ets  for  10  Selected  Providers:  1992  to  1993,  Excluding  Patients 


-0.2 


K 


with  <$120  to  Provider 


-0.15 


-Or4- 


0.05 


R 


-0.1 


-0.05 


M 


-0.05 


-0.1. 


-0.15 


-0.2 


♦Q 


N 


0.05 


^   Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements      — ^ 

Source:  NCH  file.  1992  and  1993. 


00 
I 

U 


Si 

§ 
E 

S2 

3 
J3 

E 
■<u 
a: 

I 

J2  -0 

Q) 

n 
E 

M 
C 

o 

•3 
CO 

'I 

Q 

0) 
O) 

iS 
c 
a> 

B 
a> 
a. 


14 


Figure  C-9:  Deviations  from  Targets  for  10  Selected  Providers:  1992  to  1993.  Excluding  Patients 

with  <  $120  to  Provider 


-0.12 


K 


-0.1 


-Or-1- 


-0.08 


-0.06 


0.05  -- 


M 


-0.04»j  -0.02 
♦R 

Q 


-0.05 


-0.1 


-0.4^ 


Percentage  Deviations  from  Targets  for  Piiysician/Supplier  Reimbursements 

Source:  NCH  file.  1992  and  1993. 


002 
N 


Figure  C-10:  Deviations  from  Targets  for  10  Selected  Providers:  1991  to  1993,  Excluding  Patients 

with  <  $120  to  Provider 


c 

Q) 

E 

0) 

w 
E 

0) 

al 

TO 
O 


0) 

cn 

TO 


E 

to 
c 
g 

■> 

(U 
Q 
<u 

O) 

jg 
c 

Q. 


0.4 

0.3  - 

0.2  - 
♦ 

0.1 


-0.3 


-0.2         ♦  -^.tV^^^^IW 

♦  ♦  «♦ 

♦  ♦  .  ♦0.1^«- 


♦  ♦ 


♦  ♦ 


♦ 
♦ 


♦ 


♦ 
♦ 


#  ♦ 


0.1 


♦  0.2 


0.3 


0.4 


♦  ♦ 


-0.2 
-0.3  ^ 
-0.4 


Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements 

Source:  NCH  file,  1991  and  1993. 


o 

I 

U 


Figure  C-11:  Deviations  from  Targets  for  10  Selected  Providers:  1991  to  1993,  Excluding  Patients 

with  <$1 20  to  Provider 


J2 
c 
a 

E 
a 

XX 

E 
« 
a: 

3  -0 


a 
ra 

E 
o 
4: 
w 
c 
,o 

re 
■> 

0) 

Q 

0) 
D) 

ra 
<*-* 
c 

0) 

u 

0) 
Q. 


K 


— I — 
-0.25 


-0.2 


-0.15 


-0.1 


I  ♦ 


M 


-^1-5- 


0.1 


0.05 


-0.05  Q 


-0.05 


-0.1  -- 


-0.15  -- 


-0.2 


-0.25 


-0.3 


-0t36- 


Percentage  Deviations  from  Targets  for  Physician/Supplier  Reimbursements 


0.05 


N 


Source:  NCH  file.  1991  and  1993. 


Source:  NCH  file,  1991  and  1992. 


Figure  C-13:  Deviations  from  Targets  for  Physician/Supplier  Reimbursements  for  10  Providers  in  10 

Market  Areas:  1991  to  1992 


0.06 


0.04 


0.02 


-0.02  - 


-0.04 


-0.06 


-0.08 

Source:  NCH  file,  1991  and  1992 


Unadjusted 
HS  Adjusted 


Figure  C-14:  Deviations  from  Targets  for  Total  Reimbursements  for  10  Market  Areas:  1992  to 


0.08  - 


-0.12  J  

Source:  NCH  file,  1992  and  1993. 


Figure  C-15:  Deviations  from  Targets  for  Physician/Supplier  Reimbursements  for  10  Providers  in  10- 
<r  Marl<et  Areas:  1992  to  1993 

CO  .  . 

I 


-0.08 


Source:  NCH  file,  1992  and  1993 


0.15 


Figure  C-16:  Deviations  fron  Targets  for  Total  Reimbursements  for  10  Providers  in  10  Market 

Areas: 

1991  to  1993  :  


I  Unadjusted 
IHS  Adjusted 
□  HS/ Outlier 


Source:  NCH.file,  1991  and  1993. 


Source:  NHCfile:  1991  and  1993. 


ens  LIBRSRV 


III  IIIIIIIIIIIlL, 

3  aOTS  QQQ1E7E1  3